Sunday, February 21, 2016

Mike Butler: Insulation benefit grossly overstated

Government claims that $1 spent insulating rental properties brings a $2.10 benefit are grossly over-stated, Ian Harrison of Tailrisk Economics said yesterday. The error in the analysis used to promote insulation was uncovered as submissions on the Residential Tenancies Amendment Bill, which involves insulation, get under way.

That amendment would require landlords by July 1 this year to disclose in tenancy agreements the extent of insulation in their properties and install smoke alarms.

The return on a dollar spent on insulation was just 28 cents, not the $2.10 reported by the Ministry of Business Innovation and Employment, Mr Harrison said. The figure was arrived at after correcting for a major calculation error and more realistically estimating benefits.

The economic loss is around $430-million, which will mostly fall on tenants through higher rents, Mr Harrison said.

“In the Ministry’s cost-benefit analysis, the annual benefit from lower mortality was accidentally converted into a present value twice, increasing the measured benefit by a factor of 3.5 ”, Mr Harrison said.

The error appears in a 2011 paper titled "The impact of retrofitted insulation and new heaters on health services utilisation and costs, pharmaceutical costs and mortality" (1) in which a five-year present value of the benefits has been used as a measure of the annual benefit, rather than the actual average annual benefit.

This led to double-counting which inflated the claimed benefit of insulation.

The model used was complex and involved assessing benefits using dwelling and occupant populations that had a static average composition but with aging individuals.

The authors assumed that the original occupant would be replaced by a different individual in the second year, the second with a third in the third year and so on.

The logical error is that the first occupant would be still living in the house when the second occupant arrived. Therefore, the authors have increased the occupancy of the house from one to five by the end of five years.

“Our review of the underlying analysis showed that there was little robust evidence that the insulation requirements will have an across-the-board impact on health outcomes” Mr Harrison said.

The requirements are poorly designed. The major cost comes from the underfloor insulation requirement, but underfloor insulation is relatively ineffective in raising the temperature in houses, Mr Harrison said.

In an un-insulated home, only 12-14 percent of the heat escapes through the floor, while 30-35 percent is lost through the roof, another 18-25 percent escapes through the walls, and 20-30 percent heads out through the glass in windows. Between 6 and 9 percent is lost through draughts or when doors are opened and closed.

“A better targeted regime, which might require just ceiling insulation, together with direct financial support to the most vulnerable to help them with their heating bills would make economic sense. A policy based on a calculation error does not.” Mr Harrison concluded.

Meanwhile, energy savings from insulation are much less than widely believed.

The saving is only between five percent and nine percent, according to an Otago University study in 2007 titled “Retrofit alternatives for State Houses in Cold Regions of New Zealand REPORT Nº 2”, which may be seen at

Findings of the first stage of the Housing New Zealand Corporation’s Energy Efficiency Retrofit Programme suggested that only a small increase of around 0.4ºC in annual average indoor temperatures (0.6ºC average over the winter months) and a decrease in electrical energy consumption of around between 5 percent and 9 percent were observed after the HNZC upgrade package.

Mr Harrison's full report "Mandatory insulation requirements for rental properties - a review of the cost-benefit analysis" may be read at

1. The impact of retrofitted insulation and new heaters on health services utilisation and costs, pharmaceutical costs and mortality, by Lucy Telfar Barnard, Nick Preval, Philippa Howden-Chapman, et al, 2011,

1 comment:

tganth said...

I take issue with Mike Butlers remarks re the benefits of insulation in rental units. I am a long term renter and have the health problems of a cold and damp property -the black mould that was discovered in the place was unbelievably. The owner was considering doing something but his son(A real estate rental person) stopped it on both occasions saying don't do it as it wasn't worth it. It wasn't till a health worker got onto them about the place that then used "my benefits" to insulate and install a heat pump, and then promptly put the place on the market 6 mth later. This has become the common thing that land lords have been doing around the country -using the benefits of lower income families to line their own pockets and the government knows this as something was tried to stop it happening but there was too much support for the status quo! So start including those benefits as well in your costing and you get a different over sight to the benefits of doing the upgrades.