Buildings’ Energy Efficiency and the Probability of Mortgage Default: The Dutch Case

Abstract

We investigate the relationship between building energy efficiency and the probability of mortgage default. To this end, we construct a novel panel data set by combining Dutch loan-level mortgage information with provisional building energy ratings provided by the Netherlands Enterprise Agency. Using the logit regression and the extended Cox model, we find that building energy efficiency is associated with a lower probability of mortgage default. There are three possible channels that might drive the results: (i) personal borrower characteristics captured by the choice of an energy-efficient building, (ii) improvements in building performance that could help to free-up the borrower’s disposable income, and (iii) improvements in dwelling value that lower the loan-to-value ratio. We address all three channels. In particular, we find that the default rate is lower for borrowers with less disposable income. The results hold for a battery of robustness checks. This suggests that the energy efficiency ratings complement borrowers’ credit information and that a lender using information from both sources can make superior lending decisions than a lender using only traditional credit information. These aspects are not only crucial for shaping future energy policy, but also have implications for the risk management of European financial institutions.

Green Mortgages, EU Taxonomy and Environment Risk Weighted Assets: A Key Link for the Transition

“…For now, the scientific literature on the subject is in its initial state and is focused on the US market; the studies "find evidence of a significant reduction in default risk associated with energy efficiency. This effect is larger for houses that are more energy efficient" [47] and some studies confirm that "buildings' energy efficiency is associated with lower probability of default" [48], see also [49]. Ref.…”

Review on Impacts of Energy Factors on Real Estate Values

“…In Moreover, Building energy efficiency is associated with a lower probability of mortgage default [2]. In addition, Consumers capitalize the moto that « label creates transparency in the energy efficiency of dwellings » into the price of their perspectives homes [3].…”

“…Moreover, when it is explored it studies the impacts of energy on scientific point of view and it does not take into account the legally framework. Previous studies examine the link between energy and real estate price using exclusively scientific approaches [1][2][3][4][5][6][7][8][9][10][11][12][13][14]. However, our research is the first to analyze the effects of energy on property market value using analytical approach basing on scientific research findings and regulatory framework associated with courts decisions in the field.…”

Social traits and credit card default: a two-stage prediction framework

“…The primary source of our data is the European Data Warehouse (EDW), which is a repository of the universe of loan and bond level data under the European Central Bank's loan level initiative. 2 EDW has recently started gaining traction, used in studies that examine various issues like the impact of collateral eligibility on credit supply (Van Bekkum et al, 2018), the association between asset transparency and credit supply (Balakrishnan & Ertan, 2019), the riskiness of securitised loans granted to small and medium enterprises (Bedin et al, 2019), the impact of lending standards on the default rates of residential loans (Gaudêncio et al, 2019), the determinants of mortgage default (Linn & Lyons, 2020), and the association between the energy efficiency of buildings and mortgage defaults (Billio et al, 2021). When it comes to credit card default data, there is only one case study by Licari et al (2021) that uses the Markov decision process model to generate a dynamic credit limit policy.…”