Tuesday 3 July 2012

Who Pays for Greener Homes?

Why does the cost of building a new home matter to house builders?

This may seem like a stupid question, but I’m not talking about the cost of a pallet of bricks, ton of cement or roll of glass wool.  I’m talking about additional costs from meeting tighter environmental regulations. 
Specifically, why do developers of new homes care about the higher building costs from building to ever higher standards of energy efficiency?  Still seem like a stupid question?  Let me explain further.
Let us first accept the argument that “people won’t pay for this stuff”, that a more energy efficient home will command the same price as a less energy efficient home (an accepted wisdom that some in the construction industry are now starting to question). 
Let’s also assume that house builders are price-takers.  The price of a house is largely set by the “second-hand” market because buyers always have the choice to buy an existing rather than a new home.  So if building costs go up and prices stay the same the house builder’s profits are squeezed, right?

Well, not necessarily.  If changes to regulations are published well in advance of coming into force, and if regulations are applied consistently to all developers, then the price that any developer is prepared to pay for land should fall to preserve their profit margin.  Since all buyers of land build to the same regulations, they are all affected equally.  All the “pain” of the new regulations will fall onto the landowner selling to the developer. 

The value of an acre of agricultural land is around £5,000 per acre.  The same land with planning permission to build houses would sell for millions of pounds per acre.  The windfall that accrues to landowners when planning permission is granted is so massive that a squeeze on their margins is of little consequence to their decision to sell and certainly would not win them any sympathy from anyone else.

So can anyone answer the question – why do house builders care about costs?

Please use the comments section below.

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A Million Missing Low Energy Homes
Zero Carbon Homes – Carefully Check the Small Print