Positive unintended consequences of raising building standards

A study in California shows that changing codes can change a lot more than just their energy consumption.

Years ago when I worked in the development industry, I asked another developer what his secret was. He was convinced that the single most important number was what people could afford per month; if interest rates went up, he would shrink the homes. If construction costs went up, the square footage went down. The product had to adapt to the market, particularly at the lower end.

So what happens when building codes are tightened up to increase energy efficiency? Most real estate developers will whine that it means that the price of housing will go up and create hardship for younger and poorer buyers. But a new study from California, The Distributional Effects of Building Energy Codes, finds different results.

Climate zones/Public Domain

The researchers looked at houses built on either side of the lines set in the California codes for different climate zones, which are therefore built to different code standards. They found that on houses built to a higher code standard, builders modified the house size and attributes rather than cranking house prices. Since they are competing in a market on both sides of the climate zone, the price of the house in the tougher zone actually fell, since, as we know, few people will willingly pay for energy efficiency, especially at the lower end of the market.

It is clear from our analysis that builders comply with building energy codes by changing secondary home attributes, i.e., those that are not directly targeted by the codes, such as square footage and the number of bedrooms. Even though the value of the energy savings is largest for households in the bottom half of the income distribution, these savings are brought about by reducing these households’ home size. For them, the distortions in attributes lead to a reduction in home value, while for higher-income households the distortions increase home value.

So at the lower end, when they are in competition with houses across the building code climate border, house values drop thanks to the fact that Americans measure everything by the cost per square foot, which means that the smaller houses in one climate zone are going to suffer compared to the bigger ones in the more lenient zone. In upmarket houses, the home prices go up, even though the buyers will not recover it in energy savings.

We then examine the capitalization of building energy codes into home values. At the bottom of the income distribution, home prices fall, partly due to the decreased square footage of affected homes. At the top of the income distribution, prices increase for reasons that are unobservable to us. The energy use reductions for higher-income households are small, and the net present value of savings is an order of magnitude smaller than the increase in home prices, even if we assume a high marginal price of electricity. This fact suggests that building energy codes provide other benefits to these households that are difficult to measure directly, such as lower draftiness.

But then we have always said that people care more about comfort than energy savings.

Vintage California house ad/via

The authors conclude that, “unless extremely well-designed, building codes can contain incentives not deliberately created by policymakers and subsequently have unintended consequences.” But the fact that a developer builds a smaller house might not be unintended at all; the study notes that smaller houses use less energy, just because they are smaller. Serious green builders have been saying for years that we should be building less as well as building better. If the market values the houses lower because they are smaller, then somebody gets a bargain both in the purchase price and operating costs.

And the next time some building industry lobbyist says that the public cannot afford the construction cost increases that come with energy efficiency upgrades, just remind them how smart developers have always responded: take up a little less land and make the house a little bit smaller. Everybody wins, except maybe the real estate agent.