Insulation benefits might be exaggerated

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Anticipated benefits of insulation may have been dramatically inflated – thanks to a calculation error, an economist claims.

Tuesday, February 23rd 2016, 7:34PM 2 Comments

by Miriam Bell

The government’s Residential Tenancies Amendment Bill, which is currently at the Select Committee stage, will make it compulsory for landlords to install insulation in rental properties.

By 1 July 2019, all rental housing will need to have ceiling and underfloor insulation – unless it is physically impractical to install it.

The Bill has been controversial, largely because there are many who do not believe it goes far enough in terms of enforcing minimum standards for rental properties.

However, now a Wellington economist has claimed that the Ministry of Business Innovation and Employment exaggerated the cost benefits of the policy.

In a new report, Tailrisk Economics principal Ian Harrison said there was a serious calculation error in the key study which underpinned the cost benefit calculation.

“The annual benefit of insulation was accidentally converted into a present value twice, massively increasing measured benefits.”

After correcting for this major error and taking a more realistic view of the benefit estimates in other studies, the net benefits of $630 million disappear, he said.

“The $600 million insulation investment will probably generate benefits of closer to $170 million, for an economic loss of $430 million.

“The benefits are 28 cents for each dollar spent on insulation, not $2.10.”

Harrison said the loss – which is likely to fall on tenants who will be hit with higher rents - could be substantially reduced by dropping the underfloor insulation requirement.

He also said there was little robust evidence that the insulation requirements will materially improve health outcomes.

Building and Housing Minster Nick Smith and MBIE have dismissed Harrison’s findings.

Both Smith and the MBIE said they stood by the original calculations of the benefits of rental housing insulation.

However, Taxpayers’ Union executive director Jordan Williams pointed out that Harrison had previously questioned the government’s analysis of earthquake prone building risk.

“Since then, the government has completely changed course, thanks largely to Mr Harrison’s advice being accepted as correct.”

In his view, Harrison’s findings showed there was a basic mix-up of the figure MBIE plugged into its cost benefit modelling.

“It seems highly unlikely that the government would have plowed ahead with the new insulation requirements had Ministers had the correct figures,” he said.

“Their decision last year imposes costs of some $430 million even after the benefits of the scheme are factored in. That’s an enormous regulatory tax on New Zealand landlords and renters at the very time housing is too expensive.”

Williams said someone should be held accountable for the error.

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