The elusive market for comfortable homes
This article is about the question that triggered my PhD: Why is it that the housing market does not use Comfort (or Indoor Environmental Quality, if you prefer) as a selling argument? Why is it that people do not ask for comfort when searching for a new home?
As a Mechanical Engineer, I see housing as a product. And, just like any other product, dwellings have a very specific purpose: to provide comfortable and healthy spaces for people. If that is so, why aren't developers, architects, real estate agents and millionaires bragging about how comfortable their houses are? Why is it that we need governments to define building codes in order to force us to buy comfortable homes?
It is about the people, not the technology
As I said, I am a Mechanical Engineer. I got into Building Science through my Master's degree, in which I investigated how to integrate Daylight and Thermal Performance Simulations. During that time, I got in contact with tons of great people that helped me learn quite a lot about building performance simulation. After I was finished, I was convinced that I was now able to develop great buildings! I was wrong. Buildings are built and designed by someone for someone. If I was not able to get them on board, my brand-new degree would have little impact in the world. In other words, knowing how to design great homes is irrelevant when the people who design, build and/or pay for the building don't want to hire you.
I learned this when working freelance. During that time, I approached developers with the purpose of helping them develop better (i.e. more comfortable) homes for people. What they would get from this was the possibility of distinguishing themselves from their competition which, as collateral damage, would improve the housing stock. For me, the plan was great. And yet, regardless of how good I thought my plan was, developers said that "people aren't interested in comfort... we have tried".
Regardless of how odd it was, I had to trust developers. They are constantly in contact with clients, trying to get an idea of what is it that they want and trying to find the features that they think add value to their properties. Even more, developers have absolutely no incentive to ignore attributes that might help them make money. Why would they lie to me?
So, truth or not, this response was extremely counterintuitive to me. If people did not care about comfort; why would they pay more for apartments facing different orientations? Why would they be willing to pay more for properties in quiet places than in noisy ones? It did not make any sense. And yet, something was clear: the issue is not that we cannot develop comfortable homes, the thing is that we have no idea how to put them in the market. And let me tell you that it is not that developers are cheap. After all, if they see returns on their investments, they will invest more. The issue is that, as developers said, people are apparently not interested in these comfortable homes.
And then it struck me: developers know that people do not buy houses described as comfortable, not that people do not want comfortable houses. This is a crucial difference that, I hope, will be clear later. First, however, let me introduce a few theoretical concepts.
Search, Experience, and Scepticism
In the field of Economics, attributes of products are often classified as Search, Experience and Credence ones. This classification—key to the original topic of my PhD and to the questions in the introduction of this article—has some interesting consequences on what people think, choose, and choose to believe.
What characterizes "Search" attributes is that they can be assessed before purchasing a product. For instance, we can easily see the size of an apple before we buy it. "Experience" attributes, on the contrary, can only be assessed after purchasing products. Using the same example, we need to pay for the apple if we want to try it (i.e. experience it) and be certain of how it tastes. Finally, "Credence" attributes will be hard to assess even after purchasing the product. For instance, it is hard to really know whether eating apples is good for your health even after buying and eating them.
One of the main consequences of these different kinds of attributes is the credibility of claims about them. Specifically, it is really easy to trust Search attributes because there is generally no reason to lie about or exaggerate them. For instance, putting a sign saying "big apples for sale" when you only have small apples is quite useless. If you do that, people will know you are lying and simply not purchase anything.
In the case of Experience and Credence attributes, on the contrary, exaggerating and misinforming might be more fruitful. It is quite common to see signs saying things like "healthy and delicious apples for sale". Do you trust that claim? Probably not. As a matter of fact, not even the seller knows how healthy or delicious those apples are. Even more, we know that the seller wants to sell those apples; isn't there an incentive to misinform us?
And so, claims about Search attributes can be trusted and easily verified. On the contrary, claims about Experience and Credence attributes are less trusted and are paid less attention. This raises the question: If people do not trust these claims, why do we still see signs saying that there are "healthy and delicious apples for sale"? Well, these arguments can still attract people. You might go to that place because, even if you do not trust that sign, you expect to find apples that at least look delicious. And we all like to buy good-looking apples.
Within this framework, comfort is very likely an experience attribute. That is to say, people find it hard to know how comfortable property is through pictures or visits. It is true that, when viewing a house, we can check several characteristics. For instance, we can identify the orientation, the size of the closest street, whether it has double glazing, and more. However, comfort is neither of those physical things, but the end result of their combined effects. As such, it is really hard to actually know what the real level of comfort will be. For example, big windows can make a house be cold—if they do not allow the sun to come in—or hot—in the opposite case. Great double glazing windows installed in a poorly insulated house that leaks air may have little or no effect. The end results may vary.
People want comfort but they can't get it
I have been interviewing people in both Chile and New Zealand and I have learned quite a lot from my respondents. The first thing I learned is that, while Comfort might not replace attributes such as location, price and size; they are highly valued and thus they might be relevant in the determination of the price of properties. This means that at least some fraction of the population does want comfortable homes. Why aren't they expressing this preference through purchase decisions? The second thing I learned can explain that.
The second thing I learned by performing interviews is that people are more or less sceptical to advertising claims related to comfort (e.g. "great house, with heaps of morning sun"). Specifically, some people simply do not trust agents (or vendors, sellers, developers, etc.) to provide accurate information about comfort. These people will mainly ignore whoever is selling the property and favour getting the information themselves through visits to and pictures of the property. These highly sceptical people would simply ignore the sign about the "healthy and delicious apples for sale".
Other people seem to be less-sceptical, and thus they would listen to the claims about comfort, but only treat them as indicators of something "potentially good". In our previous example, these people would actually go to the store stating that they have "healthy and delicious apples for sale" expecting to find good-looking apples. In a similar manner, these individuals will go to the property and check by themselves whether the description they were given was accurate or not. In the case of any mismatch between the buyer's impression and the description given by the agent/vendor/seller will result in scepticism. Thus, the buyer will trust his or her own intuition more than the vendor.
And so, I posit that people do not purchase comfortable houses not because they do not want them, but because it is impossible for them to distinguish more or less comfortable properties. How can people express their preferences through purchase decisions that involve attributes they cannot see? The simplest option is for the vendor to provide the information... but why would people trust that information?
Overcoming scepticism and unravelling the market for comfortable housing
As stated earlier, people cannot see comfort themselves and do not trust the information given by vendors. The only option, then, is that someone who is not the vendor provides the information. This mechanism is often called Quality Disclosure and consists of asking an unrelated third-party to systematically measure and communicate Experience and Credence attributes to consumers. Probably the best examples of this mechanism in the housing market are the so-called Green Labels and Energy Performance Certificates. In very simple terms, the first one discloses the Credence attribute of "Sustainability"; and the second one, the Experience attribute of "Energy Consumption".
There are at least two elements required for Quality Disclosure to work properly: First, the disclosing entity needs to be trusted. This means that it cannot have any incentive to lie, misinform or exaggerate. And second; the information given must be significant for people. Providing irrelevant information will have no effect whatsoever.
Is it possible to sell comfortable houses? I think it is. The technology is available and interviewing people has convinced me that comfort is important in their purchase decisions. Even more, on doing so we would be improving the housing stock. Isn't this great? And yet, there are behavioural challenges that must be addressed. As long as we do not overcome these behavioural challenges, comfort will remain hidden and no one will talk or brag about it.
First, selling comfortable homes requires overcoming people's scepticism. This probably requires transparency, honesty and ethics. The mechanism of Quality Disclosure—asking a third-party with no incentive to misinform—might work well, as long as such an entity is trustworthy.
Also, in order to successfully offer comfortable homes in the market, we need to understand what is it that makes comfort valuable to people. If the information given to consumers is irrelevant to them, then it will have no effect. This is where my PhD moved to now. I am trying to figure out what is it that people mean by "comfortable home". As you can read in THIS ARTICLE, I think we know little of what people really expect from a comfortable house.
This article was based on a Conference Paper that my supervisors and I wrote some time ago. Check it out!
Molina, Johnstone, MacGregor, Donn (2020) Disclosing Indoor Environmental Quality to create value in the residential real estate market. 26th Annual Pacific-Rim Real Estate Society Conference Acknowledgements
Even if the opinions in it are my own, this article would have not been possible without the guidance of my supervisors Micael-Lee Johnstone, Michael Donn and Casimir MacGregor.