The capitalized value of rainwater tanks in the property market of Perth

Executive Summary

In response to frequent water shortages, governments in Australia have encouraged home owners to install rainwater tanks, often by provision of partial funding for their installation. A simple investment analysis suggests that the net private benefits of rainwater tanks are negative, potentially providing justification for funding support for tank installation if it results in sufficiently large public benefits. However, using a hedonic price analysis we estimate that there is a premium of up to AU$18,000 built into the sale prices of houses with tanks installed. The premium is likely to be greater than the costs of installation, even allowing for the cost of time that home owners must devote to research, purchase and installation. The premium is likely to reflect non-financial as well as financial benefits from installation. The robustness of our estimated premium is investigated using both bounded regression analysis and simulation methods and the result is found to be highly robust. The policy implication is that governments should not rely on payments to encourage installation of rainwater tanks, but instead should use information provision as their main mechanism for promoting uptake. Several explanations for the observation that many home owners are apparently leaving benefits on the table are canvased, but no fully satisfactory explanation is identified.

This report has also previously been published in the Journal of Hydrology and the  UWA Department of Economics Working Paper Series.