Re-investigating the linkage between buildings’ energy efficiency and mortgage rates

ABSTRACT

The energy use in residential buildings is one of the deciding factors in the transition to a carbon-neutral economy. Using data on Dutch residential mortgages from 2013 to 2022, we re-investigate the linkage between mortgage interest rates and the energy efficiency of buildings. The results are novel in that they are the first to empirically provide evidence in favour of a small sustainability discount of about 3 bps on mortgage interest rates for residential homes. Sensitivity checks suggest that younger-aged borrowers and those in the middle-income range benefit the most from a sustainability discount. From a policy perspective, our results are relevant as they show how banks ‘walk the talk’ and incorporate energy efficiency in mortgage terms.

KEYWORDS:

• Interest rates
• bank lending
• mortgages
• energy efficiency
• transition risk

JEL CLASSIFICATION:

• G21
• Q40

Disclosure statement

No potential conflict of interest was reported by the author(s).

Code availability

Available upon request.

Data availability statement

Loan-level data are proprietary of the European DataWarehouse.

Supplementary material

Supplemental data for this article can be accessed online at https://doi.org/10.1080/13504851.2024.2381560.

Notes

¹ ‘Climate Agreement, The Hague 28 June 2019’, Government of the Netherlands, https://www.government.nl/documents/reports/2019/06/28/climate-agreement.

² So far, Dutch energy performance requirements are limited to existing office buildings with C-labels or lower, which may no longer be used as offices. We refer to: ‘Make your office energy efficient’, Netherlands Enterprise Agency RVO, https://business.gov.nl/running-your-business/environmental-impact/energy/make-your-office-energy-efficient/.

³ A potential channel for the associated lower default risk relates to the savings in the energy bill, freeing up borrowers’ disposable income.

⁴ Background information on European DataWarehouse and details on the data preparation prior to applying the sample cleaning are provided in Section I of the Supplement.

⁵ A comparison of the loans within each category shows that our Dutch sample tends to have a higher proportion of energy-efficient buildings than the sample by Bell, Battisti, and Guin (2023). Of the buildings in our sample, 63% have high, 12% medium, and 25% low energy-efficiency ratings (compared to their sample of 23%, 49%, and 28% for high, medium, and low ratings).

⁶ We incorporate this visual evidence in our empirical model by using postcode-fixed effects and by clustering standard errors at the postcode level.

⁷ As we interact the monthly dummies with bank indicators, we are able to include market controls without getting them removed because of collinearity.

⁸ Section III of the Supplement provides univariate test results. Table 1 of the Supplement mirrors those provided by Bell, Battisti, and Guin (2023) to offer a direct comparison.

⁹ Including market controls but omitting monthly dummies or the bank-month-interactions (as in Column 5) substantially lowers the adjusted R² while increasing the magnitude of the coefficient of interest. This points towards an omitted variable problem. The explanation is simple: the market controls capture only a fraction of what happens from one month to the next. The monthly dummies absorb everything that changes from one month to the next and affect all loans.

¹⁰ For example, the Green Transition Index by Oliver Wyman shows that the Netherlands ranks first in the energy transition among European countries. We refer to: ‘The Green Transition Index’, Oliver Wyman, https://www.oliverwyman.com/our-expertise/insights/2022/jun/green-transition-index/explore-the-data.html.

¹¹ For example, Filippini and Kumar (2024) show that tax deduction policies significantly affect households’ investment decisions on energy-saving renovations.

Additional information

Funding

Data acquisition was supported by the Capital Markets Union Foundation Project – ‘Stiftungsprojekt Kapitalmarktunion’, Germany. The ‘Stiftungsprojekt Kapitalmarktunion’ comprises the three foundations ‘Stiftung für Kapitalmarktforschung’, ‘Stiftung für Kapitalmarktrecht’, and ‘Stiftung für Unternehmensfinanzierung und Kapitalmärkte’.