Energy Efficiency Valuation and Mortgage's Implicit Insurance

This thesis has two objectives. The first objective is to better understand the value of energy efficiency in buildings and its relationship to secondary market real estate prices. The second objective is to understand the cost of the implied insurance included in fixed rate mortgage (FRM) and borne by the borrower. My observations show that most research in energy efficiency ignore or make implicit assumptions about certain parameters, energy source, future energy prices and discount rates, which may have considerable impact on the energy efficiency value. In the first chapter, I develop a tool that can estimate the value of a given energy efficient investment by taking into account these parameters, the present value of a unit of energy (PVU). The PVU fluctuates throughout time and is very sensitive to the economic scenario considered (expected regulation, expected demand, and the consequent energy price path). Then, I use this tool to test the relationship between energy efficiency and real estate prices. I find that even with evidence of the tool’s informational content and explicit assumption on parameters that should impact the value of energy efficiency, real estate prices are not following the expected relationship. This suggests that either energy efficient buildings bear a potential abnormal return investment possibility or that real estate investors use energy price forecasts that are not in line with authority’s ones. In the second chapter, this thesis investigates mortgage financing. First, I determine the implicit insurance cost of fixed rate mortgage (FRM) in comparison with adjustable-rate mortgage (ARM). In this chapter, I develop a method, based on the parameterization of previous case studies with formal assumptions, in order to compute the cost of FRM. I look at the properties of the risk hedged from the household perspective. This chapter brings forth three innovations. First, this is the first research to look at the FRM cost relative to ARM in Switzerland. Secondly, this thesis is the first research that defines and explore the risk hedged. Thirdly, I develop an alternative to the conventional interest rate spread, often used to assess the cost of FRM. In addition, I characterise the risk in terms of distribution and dependence.