AHURI BRIEF

Despite energy saving upgrades, home owners spend more on power than renters

Household energy use is driven more by demographic factors

Last updated 30 Oct 2017

Amidst concerns about rising energy costs for Australian households, a look at AHURI research published in 2010 brings to light interesting differences between the energy expenditure of home owners and renters. The report, which examined 2006 HILDA data, found that on average, home owners spent more on energy running costs than households renting a similar size home in the private rental market. Such an outcome may seem counter intuitive, as the issue of the ‘split incentive’ would be expected to come into play.

Figure 1: Annual average household energy costs (2006)

Source: Gabriel, M., Watson, P., Ong, R., Wood, G. and Wulff, M. (2010) The environmental sustainability of Australia's private rental housing stock, AHURI Final Report No. 159

What is the split incentive?

Split incentive describes the situation where the costs of improving a house’s energy efficiency (such as through insulation, solar heating and double glazing etc.) are borne by the landlord but the benefits are received by the tenant through reduced expenditure on energy. Since the landlord does not reap the immediate benefits of investment in any energy saving strategy, there is little financial incentive for them paying for improvements that lead to greater energy efficiency.

Comparing energy efficiency of owner-occupier and rental housing

As a consequence of the split incentive, relatively few rental properties feature energy saving devices such as insulation or more expensive solar panels.

Figure 2: Percentage of housing with energy efficient technology (2012)

Source: 2012 ABS Household Energy Consumption Survey

The 2012 ABS Household Energy Consumption Survey revealed that 84.5 per cent of home owners and 86.6 per cent of owners with a mortgage had insulation while only 38.5 per cent of households renting in the private market had insulation, and, not surprisingly, while 1 in 5 (20.2%) home owners and owners with a mortgage had a solar electric system and/or solar hot water system, only around 1 in 27 (3.7%) households renting in the private market had a solar electric system and/or solar hot water system. Considering the differences in the energy efficiency of owner-occupier and rental housing, one would expect tenants’ energy costs to be higher, but as the research shows, this is not the case.

So why are home owners still spending more than renters on energy?

Household energy use is driven more by demographic differences between home owners and renters.

Table 1: Demographic comparison of home owners and private rents (all in 2006$)

 Home owners/buyersPrivate renters

Average age

54.6 years

40 years

Average annual expenditure on electrical appliances

$1,416

$1,076

Average annual gross household equivalised income

$42,323

$37,944

Mean net worth

$598,274

$79,600

Mean non-housing net worth

$268,292

$78,565

Source: Gabriel, M., Watson, P., Ong, R., Wood, G. and Wulff, M. (2010) The environmental sustainability of Australia's private rental housing stock, AHURI Final Report No. 159

Home owners/buyers are significantly older, and as people age they ‘become more averse to extreme temperatures’ and are therefore likely to spend more on heating or cooling their home to cope with weather events.

In addition, AHURI research suggests that home owners/buyers, with their higher mean annual income and net worth, spend more on energy for their homes because they can afford it, and are therefore less likely to take ‘small’ actions to save energy. The research shows that ‘low-income households used cold water to wash, switched off electronic equipment and kept doors and windows closed when operating heating or cooling more often than high-income households.’ If higher-income households also take such steps they will reduce their spending on energy.

Nevertheless, for tenants in energy inefficient homes, energy costs are higher than they would be if landlords could be incentivised to invest in energy efficient upgrades such as installing insulation. Research shows even among private rental investors who were relatively supportive of environmental measures, the major barriers to adopting energy and water saving measures were viewed as cost and a lack of financial incentive to act. They did not believe they would be able to recoup costs through higher rental yields. The investors also noted that low vacancy rates meant they had little incentive to upgrade properties to attract tenants.