Current Housing Provision
2.2 The Market Failure of Sustainable Housing
Globally, the housing construction industry largely operates under a neo- classical economics framework—a framework which has guided societies and industries around the world for many decades [1–4]. Neo-classical economics theory states that competition in the market benefits both consumers and industry which ensures efficiencies between supply, demand, scarcity, and cost [5–7]. Thereby, this competition reduces the requirement for government intervention as industry and consumers will determine what the best outcomes are including what products, materi- als, and services are valued and desired. This idea of ‘competition’ and the need to innovate to find cost efficiencies has reinforced the narrative the housing construction industry uses to advocate for fewer (and certainly not more) regulations.
Opponents of regulations that set requirements for quality and sus- tainability (among other outcomes) claim that these regulations create
‘red tape’ which adds time and cost to developments which are passed onto consumers and create further financial challenges in an already unaffordable housing market [8–11]. It is also argued that regulation does not only impact the bottom end of the housing market, but also stifles the ability of companies to innovate when the innovation does not conform to regulations. Therefore, in these arguments, consumers miss
out on two fronts: it adds costs but also constrains what the industry can delivery.
Instead, opponents of regulation suggest that consumers will use the competition of the free market to decide what types of housing they want built, where they want it built, and at what quality and sustainability level. This means that if someone wants a large house, they can have a large house as long as they have the money. If they want granite bench- tops in their kitchen, they can have them. And if they really want extra insulation, solar panels, double-glazed windows, and passive solar perfor- mance, they can have it. But consumers must ask for these things and be able to pay for them.
This thinking is based on three critical assumptions about consumers:
(1) that consumers make rational decisions, (2) that consumers make decisions that maximize the outcome for themselves, and (3) that con- sumers make these decisions independently, based on complete informa- tion [2, 12]. These assumptions are contested within the environmental economics and broader social and sustainability literature [13–16].
We know that consumers often have other motivations distinct from self-interest and profit maximization, which are part of the choice pro- cess, or have a range of constraints impacting their decision making. Yet, these realities are not captured in the above assumptions and consumers rarely have complete information when making choices [17–21]. For example, the decision to buy a dwelling is limited to the existing dwell- ings available for purchase at that point in time or finding land to build a new dwelling (or via knock-down rebuild), which itself is limited to what is available or already owned. This decision is also constrained by budget. Similar constraints apply for renters. In many countries, there is currently an undersupply of housing, making it even more competitive or challenging for those wanting to buy or rent property [22, 23]. All this means that housing consumers face a constrained choice, even before other factors like improved sustainability are considered and therefore the market is not operating as the theory about the free market suggests.
This neo-classical market framework has enabled significant wealth accumulation by key stakeholders in the housing construction industry at the expense of housing quality, affordability, sustainability, and social outcomes (see Chap. 3). It is not just key stakeholders in the housing
construction industry who have made significant profits from construc- tion, but also governments. Governments are heavily dependent on con- struction in many parts of the world. The health of the housing construction industry is intrinsically linked to different levels of govern- ment, as it is a key determinant of economic measures like Growth Domestic Product and provides significant income for governments via development fees and property and land taxes. We have seen evidence of this with governments’ responses around the world to the Global Financial Crisis in the late 2000’s and COVID-19 recoveries (from 2020 onwards) where infrastructure and building projects have been key pillars of eco- nomic and social recovery. However, this can also be seen as a catch-22, where governments have found themselves wanting to make housing more affordable and accessible to all, but knowing that any decrease in housing value will impact their property income and the broader health of the economy. It is a tightrope that governments have been walking for decades and the loser is often the consumer; we are seeing the price of housing for purchase or rent rapidly increase in many jurisdictions around the world, often faster than the increase in wages and often without any measurable improvement in housing quality, sustainability, or even access to nearby amenities.
As explored in Chap. 1, sustainable housing has a clear range of bene- fits. In addition to providing more basic safety and security that housing entails, sustainable housing can reduce environmental impacts, reduce living costs, and improve health and well-being [24–26]. If we accept the
‘rational’ consumer assumed by the industry and many policy makers, we should expect to see consumers demanding improved sustainability out- comes for new and existing housing. However, around the world, we have seen that consumers are generally not engaging with sustainability beyond what is set in minimum performance standards unless there is significant financial incentive for them to do so (e.g., residential solar rebate programmes, mandatory disclosure of building performance pro- grammes). For example, research of the Nationwide House Energy Rating Scheme in Australia found that from 2016–2018 almost 82% of new detached housing was built to meet only the minimum building code requirement, with only 1.5% built to the economic and environmental optimum (higher) performance [27]. From 2019 to July 2022, this had
fallen to 1.4% of new housing [28] despite it corresponding to the period of time where significant public, industry, and policy discussion was occurring about a likely increase to minimum building performance requirements that were announced in August 2022.
Some jurisdictions are delivering a much higher percentage of new dwellings closer to the technical performance outcomes required for a low carbon future. For example, data from the UK found that, while there was only around 1.3% of all new housing built to the Energy Performance Certificate rating A across 2020–2021, most new houses are achieving an Energy Performance Certificate rating B (Fig. 2.1). While this might seem like a good outcome, especially in comparison to Australia, the design, quality, and performance of new housing in the UK is still being criticized for being insufficient to respond to the climate emergency [9]. Additionally, with new dwelling construction only repre- senting a small percentage of the overall stock in the UK, the more sig- nificant issue is the poor design, quality, and performance of existing housing which primarily have ratings of D or worse (Fig. 2.2).
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Fig. 2.1 Energy Performance Certificate ratings for new housing in the UK from 2012–2021. Energy efficiency grades from A (best) to G (worst) [29]
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Fig. 2.2 Energy Performance Certificate ratings for existing housing which undertook an Energy Performance certificate in the UK from 2012–2021. Energy efficiency grades from A (best) to G (worst) [30]
The push by some key housing construction industry stakeholders and policy makers to leave housing quality and performance ‘to the market’
assumes that consumers can access and understand the design, quality, and performance information of dwellings. This has largely been found to not be the case, both in terms of access to such information as well as the understanding of what it means [21, 31].
There are some notable attempts to provide housing customers improved information about the design, quality, and performance of housing to address market information gaps [32]. For example, manda- tory disclosure of building performance, which typically requires all houses being sold or rented to have an energy or performance rating, are among some of the longest running housing information programmes.
Such programmes include the Energy Performance Certificates across the European Union (EU) and UK and the Civil Law (Sale of Residential Property) Act 2003 in the Australian Capital Territory (Australia) [33, 34]. In some of these jurisdictions, there is now more than 20 years of data and research is increasingly focusing on understanding the influence of the provision of information in these jurisdictions. Largely, the evi- dence suggests that the provision of easy to understand, verifiable and
independent information results in positive outcomes across a range of different metrics for housing consumers such as driving the uptake of energy efficiency retrofit.
Improved information for housing consumers is translating into an improved willingness to pay for sustainability in some jurisdictions. For example, housing consumers across different jurisdictions put a sale or rental premium of up to 15% or more on higher quality and performing dwellings [35–44]. However, positive sale or rent value is not universally found in the research. For example, in Northern Ireland, researchers found that dwellings with higher Energy Performance Certificates were not more likely to increase in sales price [45]. In Chile, consumers associ- ated higher ratings with higher prices which resulted in an unwillingness to pay for improved outcomes [46].
Beyond the impact on sale or rent price, improved information about dwelling quality and performance has been found to enhance opportuni- ties for consumers to undertake retrofit activities or seek out higher per- forming dwellings which would reduce their cost of living and improve other outcomes such as thermal comfort [47–50]. For example, Sweden is one jurisdiction with an early introduction of the EU Energy Performance Certificate requirement where owners of multifamily dwell- ings were required to obtain a certificate before the end of 2008. With the certificates lasting ten years, there has been a significant number of dwell- ings in Sweden that have had a second rating completed. Von Platten et al. [51] analysed the first and second round certifications and found that energy performance in existing housing had improved and that improvement was greater in rental (private and social) rather than owner- occupied dwellings. In a study surveying homeowners across 12 EU countries, Charalambides et al. [50] found Energy Performance Certificates played a role in renovation decisions as well as rent/buy deci- sions, but the results of the influence varied significantly across jurisdic- tions. The authors found that, for those who had already renovated their homes, 59% said the information played a very important role in under- taking the renovation and 20% said the information was somewhat important. Across the emerging body of research there seems to be a posi- tive association with improving housing quality and performance and understanding the value of this.
There has also been research exploring the role language and key inter- mediaries, such as real estate agents and builders, play in educating con- sumers [52, 53]. Hurst [19] explored how the language used by real estate agents advertising houses for sale in Melbourne (Australia) engaged, or did not engage, with sustainability. Analysing more than 150,000 adver- tisements from 2008–2015, Hurst found that only around one in five houses had some mention of sustainability. While this percentage slightly increased across the analysis period (up to one in four), Hurst was critical of the way sustainability terms were being used. Often, sustainability was used to elicit a feeling of ‘home’ rather than have more meaningful dis- cussions. For example, 81% of the advertisements contained no key words about energy efficiency and another 15% only contained one key word. Hurst [19] also found that, where sustainability was discussed, it was often placed in the middle of the text, while consumers are more likely to remember the first and last parts they read. He argues that the lack of emphasis placed on energy efficient characteristics ‘has the poten- tial to dilute the importance of reducing energy consumption in housing and retard market acceptance’. (p 196).
It is not only real estate agents who have a critical role to play in dis- seminating sustainability information; the practices of the housing con- struction industry itself are just as critical [54]. Warren-Myers et al. [21]
analysed the 30 largest builders of detached homes operating in Australia to see how they communicated on their websites about housing energy efficiency and performance. Only two thirds of builders mentioned energy rating requirements, while half stated that the regulated 6 star minimum (0 worst–10 best) was part of their individual standard despite it being legally required. Furthermore, the researchers found that, in many cases, the builder’s communicated information about the 6 star minimum in misleading ways. For example, there were multiple exam- ples where websites presented a visual representation of stars, but with only 6 stars rather than 6 out of 10 (the maximum). This was deemed as misleading ‘due to semantic confusion’ and was arguably in breach of Australian consumer laws. In earlier research, it was noted that, ‘the lack of information relating to sustainability provides evidence for why con- sumers demonstrate little engagement in the sustainability agenda when entering the building process’ [52, p. 35].
This lack of consumer and stakeholder understanding about sustain- able housing is not just limited to the dwelling itself, but also broader considerations of how the house is impacted by, and impacts, wider sus- tainability. For example, research by Ambrose [55] finds that many peo- ple do not think about how the energy they use in their home is generated.
While these information programmes and intermediaries have been recognized as playing an important role in trying to improve understand- ing and engagement with sustainability in housing, there is an ongoing challenge that many consumers are not responding, or are unable to respond, to what improved performance of their housing means for them, society, or the environment. Consumers are responding to what is being provided or what they have known or experienced previously (i.e., social norms). Clearly, there continues to be a market failure occurring in relation to sustainable housing. Research that has asked what consumers look for in housing continues to identify elements such as price, location, number of bedrooms and bathrooms, and the quality of the kitchen above considerations of sustainability [19].
This market failure is not new. To address this issue, governments around the world have been trying different policy levers to improve the quality and performance of housing, including the aforementioned man- datory disclosure schemes. By far, the most common policy approach has been the setting of minimum performance requirements within building codes. There has been a long policy history in some jurisdictions with energy efficiency and performance requirements in an attempt to improve the bottom of the market, while other jurisdictions have only engaged with this approach in more recent years [56]. This is explored in the fol- lowing section.