Costs to Incorporate Green Features

The cost to make a home green (energy efficiency, water and indoor quality, etc) is higher than the cost of construction of other homes, and this differential may persist as more builders enter the green market. However, builder experience with green technique reduces cost as engagement in the market increases.

McGraw Hill Construction’s (MHC) data and analytics team surveyed a set of NAHB single-family and multifamily members in 2013. MHC defines a green homes as “one that is either built to a recognized green building standard or an energy- and water-efficient home that also addresses indoor air quality and/or resource efficiency.”

According to the findings, the incremental cost for builders to construct green homes was 8% in 2013. For remodelers, green projects raised costs by 9% on average.

The new home cost incremental  was one percentage point higher than determined in the 2011 survey, but lower than the 11% increase reported in 2006 and 10% in 2008.

cost to go green

McGraw Hill’s analysis found that the cost to build green varied to some degree by the amount of green construction undertaken. For example, single-family builders who reported 30% of green projects of total operations indicated that the incremental costs were 5.7% on average.  On the other hand, no such scale effects were reported for multifamily developers who on average faced similar incremental costs regardless of the share of green construction.

For remodelers, those business who report 30% green projects faced an incremental costs of 7.5%, compared to 9.5% for those doing less than 30% green projects.

The survey findings highlight the higher costs of incorporating certain energy-efficient or other green features, which suggests that consumer choice should hold the leading role in determining market share of various green features.



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7 replies

  1. Interesting article. However, it appears to only cover the initial up-front costs of “green” investments. Green buildings often have higher value (due, in part, to lower utility costs). This higher building value results in higher property tax payments — not just in the year of construction, but every year thereafter that these improvements add value to the building. Over time, a 1% or 2% property tax can have the economic impact of a 10% to 20% sales tax on construction labor and materials.

    Some people wonder why more people aren’t making “green” improvements to existing homes. In part, it may be because the traditional property tax reduces or eliminates the savings achieved from “green” and other energy-saving improvements.

    Some jurisdictions have rectified this situation by reducing the property tax rate applied to privately-created building values while increasing the tax rate to publicly-created land values. These jurisdictions collect the same property tax revenue, but the incentives facing owners are much more productive.

    The lower tax rate applied to building values makes buildings cheaper to build, improve and maintain. This is good for residents and businesses alike. Surprisingly, the higher tax rate applied to land values helps keep land prices more affordable also. This is because the higher land tax discourages land speculation. Also, owners of high-value land are motivated to develop their properties to generate revenue from which to pay the tax. High-value land tends to be urban land near infrastructure amenities like transit — and these are the very sites where development makes the most sense.

    Thus, for more affordable housing, for job creation, and for an increase in “green” and energy-saving investments, this property tax reform can be very helpful.

    • This is true. But many states allow for a homestead credit which will help to hold the tax expense down.

      • Homestead tax deductions (or credits), where they are applied, are applied regardless of energy-saving improvements. Thus, if I have a $100,000 home and my state offers me a $10,000 homestead deduction, the tax rate is applied to $90,000. However, if I make an energy-saving improvement that adds $10,000 in value to my home, then the tax rate is applied to $100,000 ($110,000 – $10,000). Thus, increasing the value of my home by $10,000 subjects me to a tax on that $10,000 in spite of the homestead deduction.

  2. Another point that is not addressed is that much of what constitutes “green” building is simply following energy codes, building codes, manufacturers recommended installation instructions, and good building practice. For example, green programs provide incentives (or requirements) for preparing HVAC load calculations and duct designs which in most regions are required by code; thermal insulation installation instructions from manufacturers require grade 1 quality and all appropriate air sealing, also required by energy codes – these items are also invented in green programs. Moisture management with proper flashing is part of window manufacturer’s requirements and some codes. Advanced framing techniques can reduce costs and improve performance. I believe that much of the 8-9% stated “premium” is due to the fact that much residential construction today is sub-standard and upgrades to meet green certification are simply meeting basic codes and instructions. If we can begin demanding high quality and legal construction practices, green will follow at little, if any additional cost.

  3. I’d like to see a perspective of the long term cost savings of a green construction as well. In most cases, we conserve resources as well as energy by choosing green alternative AND help the environment as well.

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