Modeling the impact of Climate transition on real estate prices

Paper: arXiv 2408.02339

Authors: Lionel Sopgoui

Abstract

In this work, we propose a model to quantify the impact of the climate transition on a property in housing market. We begin by noting that property is an asset in an economy. That economy is organized in sectors, driven by its productivity which is a multidimensional Ornstein-Uhlenbeck process, while the climate transition is declined thanks to the carbon price, a continuous deterministic process. We then extend the sales comparison approach and the income approach to valuate an energy inefficient real estate asset. We obtain its value as the difference between the price of an equivalent efficient building following an exponential Ornstein-Uhlenbeck as well as the actualized renovation costs and the actualized sum of the future additional energy costs (before and after the renovation date). These costs are due to the inefficiency of the building, before an optimal renovation date which depends on the carbon price process. Moreover, since the renovation increases the efficiency of the building, which is random, the future additional energy costs become smaller and even zero if the optimal energy efficiency is reached. Finally, we carry out simulations based on the French economy and the house price index of France. The findings support the conclusion that the order of magnitude of the depreciation obtained by our model is the same as the empirical observations.

Complexity vs Empirical Score

• Math Complexity: 7.5/10
• Empirical Rigor: 5.5/10
• Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper provides a rigorous mathematical framework extending valuation approaches via multidimensional Ornstein-Uhlenbeck processes and deterministic carbon price paths. While it includes simulations based on French economic data to show realistic depreciation orders of magnitude, the empirical validation relies primarily on calibrated simulations rather than extensive historical backtesting.

Research Flowchart

  flowchart TD
    A["Research Goal: Quantify Climate Transition Impact on Real Estate Prices"] --> B["Inputs: Sector Productivity (OU Process), Carbon Price, French Economic & HPI Data"]
    B --> C["Model Formulation: Extend Sales Comparison & Income Valuation Approaches"]
    C --> D["Optimization: Calculate Optimal Renovation Date & Post-Renovation Efficiency"]
    D --> E["Valuation Process: Asset Price = Efficient Price - Actualized Renovation & Energy Costs"]
    E --> F["Validation: Simulations using French Real Estate Market Data"]
    F --> G["Key Outcome: Model-Derived Property Depreciation Matches Empirical Observations"]

Cited References (26)

1. OECD Compendium of Productivity Indicators 2021 – Investment by asset type (2024) — link
2. Valuation of properties and economic models of real estate markets (2003)
3. A pricing framework for real estate derivatives (2012)
4. Modeling loss given default with stochastic collateral (2015)
5. Microeconomics (2004)
6. Product - Products Datasets - Eurostat (2022)
7. 91/EC of the European Parliament and of the Council of 16 December 2002 on the energy performance of buildings (2002)
8. Que signifie la classe énergie d’un logement? (2024) — link

1 of 26 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.