Introduction
As people become more aware of the benefits of making their homes more energy-efficient, it is becoming an increasingly popular topic. Not only does it help to reduce your carbon footprint, but it can also save you money on your energy bills - a particularly important factor given the current cost of living crisis.
However, a common question that arises when considering making your home more energy efficient is how much value does it add to your home? Unfortunately, despite the simplistic analysis variously published, the answer is a bit more complex.
In this blog we are going to look at the complexity around this question and come up with the best estimate given the available data.
The age old question of correlation vs causation
Correlation and causation are two distinct concepts in statistics and research methodology.
Correlation refers to a statistical relationship between two variables, where a change in one variable is associated with a change in the other variable.
Correlation can be positive (when one variable increases, the other also increases) or negative (when one variable increases, the other decreases).
However, correlation does not imply causation, meaning it does not indicate that one variable causes the change in the other variable.
Here is an article that gives some great examples of correlation that are not causation, my favourite being the number of pirates in the world being highly correlated to the global average temperature.
In the context of enhancing a property's energy efficiency and the subsequent increase in property value, it is important to consider that homeowners who invest in energy efficiency improvements are also more likely to invest in other property upgrades (e.g. painting, new flooring, kitchen and bathroom renovations).
This makes it challenging to determine the true driver of the increase in property value—whether it is the new kitchen and fresh coat of paint or the more energy-efficient windows.
Is there a correlation between improving energy efficiency and property value?
At Bricks&Logic, we analysed all the sales in England and Wales between 2019 and 2022, where the property in question had an Energy Performance Rating of D or better, and had improved from the last time it was sold from D or worse. (Note: we excluded very few A-rated properties from our data set.) We then compared the change in value between the two sales with the general change in value of properties of that type without energy efficiency improvements.
Using our highly accurate and localised property indices, we are able to understand where a property has increased in value more than would normally be expected.
Table 01 shows a strong correlation between energy efficiency improvement and price increase.
Is correlation unique to energy efficiency improvement
The increases in value are not uniform. Chart 01 shows the average increase in property value where the EPC rating improved versus the starting value of the property expressed in a % rank of expensiveness.
For example, if your property was cheaper than 90% of other properties in England and Wales, the value was seen to increase with an improved EPC by over 4%. If however, your property was in the most expensive 10% bucket, then the average increase observed was only 3.25%.
Is this reverse correlation between 'relative expensiveness' and observed value increases after a property improvement unique to EPC improvements, or can it be observed in more general condition improvements?
To answer this, we analysed our Partner Estate Agent listings to find the average price difference between a property we deemed to be in "poor" condition relative to one that was in "good" condition.
Read more in our blog post about how we leverage ChatGPT to assist Estate Agents.
Chart 02 shows the same correlation as before, but with a more significant increase in value at the very expensive end. This upturn is likely because very expensive properties often have work done that far exceeds what other properties might have, such as the addition of a swimming pool or an extremely expensive kitchen.
In summary, cheaper properties achieve a higher proportional increase in value than more expensive properties after an EPC improvement but the same relationship exists after a cosmetic improvement.
In reality it is likely that in many cases, the work which improves the energy efficiency of a property also improves the visible property condition.
It is therefore likely that if you replace your windows, you would increase the property value more than if you installed hidden insulation despite the energy improvements being the same.
The economic benefits for making your property greener
As everyone is aware, energy costs have increased dramatically over the last twelve months, making the economic case for making your home greener stronger than ever before.
For example, if we take the installation of cavity wall insulation, research from the Energy Saving Trust shows that the average detached house could save £690 per year on heating bills. Over the lifetime of a 25-year mortgage, this would equate to £17,250 in savings. The supports the argument that cheaper properties see a higher percentage increase in their value after works have been carried out. For instance, for a detached home worth £300,000, £17,250 is 5.75% of its value, while it is only worth 3.45% of a £500,000 property.
In recent months, the focus has moved to landlords as new minimum energy efficiency requirements for rental properties are set to become law by 2028. All rental properties will need to show an EPC rating of C or better by then to continue being legally let.
Additionally there is increasing anecdotal evidence that the energy efficiency of a property is becoming a key attribute among tenants, increasing the attractiveness of properties with a better EPC rating.
How Bricks&Logic is helping clients navigate this area
While it is difficult to isolate the effect of improving energy performance on a property, our analysis at Bricks&Logic shows a strong correlation between energy efficiency improvement and price increase. However, it is important to note that the increases in value are not uniform and depend on various factors, including the type of work carried out and the relative value of the property.
Nevertheless, making your home more energy-efficient is becoming increasingly popular due to rising energy costs, and it can result in significant savings over the lifetime of a mortgage.
Additionally, with new regulations requiring a minimum energy efficiency rating for rental properties, conforming to these requirements can make a property more attractive to potential landlords and tenants, resulting in better yields and increased property values. Ultimately, improving energy efficiency can have both economic and environmental benefits, making it a worthwhile investment for homeowners.
At Bricks&Logic, we have developed an application that provides an estimated increase in property value with energy efficiency improvements, taking into account everything we have discussed in this article. We provide an upper and lower range that is tied in with the factors being considered, such as overall property value, rental demand, the type of work being carried out, and current prices for heating and lighting.
You can try it here.
If you would like to find out more about how you could integrate this product to help your clients, please get in touch or book a demo via our professional page.
