Do private rental tenants pay for energy efficiency?: The dynamics of green premiums and brown discounts

Abstract

The rental market, notably within the UK, is facing increased scrutiny with the tightening of regulation in relation to energy performance and the increases in energy costs and rental unaffordability. Whilst a sizeable volume of research has examined the pricing effects of EPCs and house prices, scrutiny of this relationship within the private rental sector remains more embryonic. This study, using 2,914 transactions for Northern Ireland, extends the traditional analysis beyond the conditional mean estimate by examining the quantiles of the relationship between EPCs and rental prices. The findings provide evidence of a rental premium of 0.2% for a one-point improvement in energy efficiency. In terms of EPC ratings, we find premiums for B- and C-rated dwellings of 8.2% and 2.4% and also discount effects for E, F and G-rated properties ranging between 3.9%-5.5%. The quantile findings exhibited a parabolic effect across the price distribution demonstrating the lowest and highest priced properties to comprise higher price premiums of 13% and 16% for B-rated dwellings, however more pronounced discount effects for F- and G-rated properties at the lowest and highest deciles. The findings provide evidence to help alleviate the split-incentive problem between landlords and tenants within the UK.