It's not cost-effective going green

As we look to what's ahead for 2012, Property Observer is republishing some of our most noteworthy stories of 2011.

A recent real estate survey conducted by Yahoo!, concerning the aspirations of home ownership among U.S adults found 81% of those surveyed still regarded home ownership as part of the “American dream”. There’s nothing particularly surprising about this – except of course when you consider the record numbers of foreclosures and tumbling values America is still experiencing.  However what’s more surprising is how priorities differ from the average Australian buyer.  When asked what their “dream” home would consist of, among the choices including “water views” , “beachfront or near beach” “building a custom home”, or “living in an urban neighbourhood” , top of the list, outshining everything else, came “green or energy efficient” –  and comments such as “Small, environmentally friendly, very energy efficient” were voiced from those surveyed.

If the same survey were conducted here, I have little doubt energy efficiency would be a tad further down the list of dream priorities. This isn’t to say that consumers don’t see the importance of insuring against rising bills, however out of the hundreds of purchasers I assist throughout the year – particularly those looking for their “dream 20-year-plus” property – I’m never asked to search for an energy-efficient home.  Energy efficiency is a third or fourth thought, with location and size (bigger, not smaller) usually featuring top of list.

While vendors may like to mentally add the cost of fitting solar panels or a large outside water tank onto their perceived estimate of value when selling, purchasers and more pointedly valuers don’t generally take such additions into consideration when assessing price.  For the purchaser, they are improvements that can budgeted for at some future point and not an outlay they’re necessarily prepared to pay with an upfront premium. Therefore inAustralia, improving a home’s energy rating may be a wise choice from a lifestyle perspective; however it’s not an outlay that’s likely to profit the vendor from an investment perspective – at least not yet.

In other countries the trend towards energy efficiency is far more pronounced. I recently met a new immigrant from the Netherlands.  The family are currently renting in one of the middle-ring suburbs of Melbourne and took the time to explain how an energy-efficient, “carbon-neutral” property was top of their search priority list.  In fact so forthright were these specific requirements they emphasised the property must (in comparison with Australian homes) be compact and small in size.  They didn’t see the need for a large home – in their minds it simply didn’t make economic sense.  It took me right back to my days in the UK where, due to a higher population and limited availability of land, living in a small upstairs/downstairs terrace was the accepted norm and larger single level homes were seen as rather superfluous and typically reserved for older couples. The family in question soon came to realise that they weren’t going to easily find their dream property and renovating or rebuilding was probably going to be their only option.

Australians are known for their love of large houses and we arguably have the largest in the world.  It’s been discussed more than once how the lust for large McMansion-style properties is not diminishing. It’s never more evident than in the outer suburban growth corridors, where according to market leader Oliver Hume’s latest survey of purchaser sentiment the preference is still for homes with a floor size of 279 square metres – even though they do concede that due to affordability, buyers often end up settling for 50 square metres less than they initially desire.

One of the main reasons purchasers buy in the outer-suburban areas is simply because they can’t afford family-sized properties close to the city.  They’re prepared to give up the luxury of a quick commute to work to secure their version of the “Aussie dream”.  However in doing so, they’re also likely to find themselves paying a premium not only because of tactics such as limited land releases and hefty development overlays – but also due to strict building regulations imposed on builders to ensure the property meets the new six-star energy rating now adhered to in most states. It’s not a choice; it’s a requirement, and one that isn’t necessarily going to provide a saving on the average electricity bill considering the initial outlay.  More importantly, it puts the price of new suburban property needlessly out of reach of those prepared to move into the newer – still developing – suburbs.

Since the efficiency code was first introduced in January 2003, the initial requirement of a four-star rating has now increased to a six-star rating in most regions of Australia. The rating covers such items as “performance of the building fabric, external glazing and shading, sealing of the building, effects of air movement, performance of the building’s domestic services” and so forth. Of course, while this all sounds like a positive move, none of it comes without cost.

Last year, the The Centre for International Economics prepared a detailed report for the Master Builders Australia highlighting how increasing the star rating and the associated cost thereof doesn’t necessarily achieve the desired measure of economic efficiency that would widely be perceived.  In fact, the marginal benefits of squeezing into to ever stricter star rating requirements are outweighed considerably by the upfront cost of the build.  And while this is disputed by various voices coming from the “green” side of the political arena, the report produced is compelling reading.

It argues the costs of moving from a five- to six-star property is $40 per square metre, five to seven stars $70 per square metre, and five to eight stars $190 square metres.  In fact, back in 2008 when the increased implementation of a six-star rating was under discussion in Victoria, Master Builders Australia was reported stating costs could add anywhere between$10,000 to $14,000 to the build of a new home.  Furthermore, before a building permit can be issued, an accredited assessor is required to perform an energy rating assessment, which falls somewhere between $1,000to  $4,000 depending on the size and design of the property – and I can vouch from experience the resulting reports differ depending on the individual used (and have therefore been highly controversial).

Not only this, but we now have the added concern of the carbon tax looming.  Estimating the increase in various prices prior to implementation is unreliable, however HIA have posed that it’s likely to put at least $6,000 on an average house-and-land package. Add all the figures together and the concept of buying in the outer suburban corridors for the sake of a larger more affordable home suddenly starts to look a little less affordable and desirable and provides very little benefit to the consumer considering the extra outlay.

All these new policies come wrapped in great noble gestures and presented for “our benefit” – or more grandly, for “the greater good of mankind”.  But the reality is an expensive one and rather than making the cost of living and acquiring shelter more affordable, the dream of home ownership – even in outer-suburban areas where land and prices should be considerably lower – is slowly slipping away for an increasing number of Australians for reasons that just do not make economic sense.

No home owner is against implementing sensible energy-saving measures. We all recognise the expense of living is increasing and many have been motivated to take advantage of solar power, double glazing, roof insulation, and other such improvements to reduce the cost to themselves (and the environment) when it makes sense to the back pocket to do so.  In other words we don’t have to be forced to reduce our carbon footprint especially when it reduces the bills.  However, forcing up the price of new homes, without clear evidence that it will not only benefit the environment but also reduce the power bills in relation to the initial outlay is both unfair and unreasonable – especially when it’s in everyone’s interest to encourage the move “outwards” and not “upwards” if we’re to ease the unsustainable levels of inflation witnessed in the inner and middle-ring suburbs during boom cycles of the property clock.

Furthermore, as outlined in many reports such as the Annual Demographia International Housing Affordability Survey, which advocates the importance of spreading outwards if we’re to reduce the cost of housing, “greenhouse gas emissions of those living in high-density areas are greater than for those living in low-density areas” and “per person, apartment living uses more overall energy”.

This isn’t surprising – in new apartment blocks (which incidentally also have to adhere to the six-star energy requirements) lights are left burning perpetually in the common areas, electricity usage is increased to power lifts and additional security features, not to mention the price of heating the pool, sauna, and 24-hour gym used as added “enticements” for would-be residents.  It makes scant sense from an environmental perspective and in addition, once purchasers find out how extortionate the owners’ corporation fees are to power these features, it generally places first-home buyers out of the equation all together. (In fact, look into the major buyer demographic purchasing the surplus of high-rise property spruiked to ease housing affordability in the inner and middle-ring suburban areas surrounding our major capitals, and you’ll find investors take the lion’s share, with second homebuyers coming a close second). At every stage of the planning cycle, first-home buyers seem to fall through the cracks – and unless we encourage an increase in the accumulation of affordable new residential buildings in the newer growth suburbs, it’s not going to improve.

Maybe one day the average Aussie buyer will also have energy efficiency at the top of her list when it comes to choosing her dream home – however until it’s proven to save home owners in their back pocket and not pilled disproportionably onto the initial cost of a new suburban property for the sake of “looking green”, it’s not going to ease the housing pain for the average Aussie purchaser – and instead of focusing on such measures – top of the “dream” list for home buyers will simply be a roof and four walls, preferably in an area that provides an easy commute to work.

Catherine Cashmore is senior buyer advocate for Elite Buyer Advocates. With extensive experience in all matters regarding real estate, Elite Buyer Advocates purchases and negotiates more than $100 million worth of property each year for its clients.