The world of housing is about to go through a series of evolutions that will, with the benefit of hindsight, look like a revolution.
The Department for Business, Energy and Industrial Strategy is driving the agenda on how to upgrade the energy performance of the UK housing stock. This comes with many problems. There are approximately 27 million dwellings across the UK. About 35% of homes are owned outright by their occupants, and a further 35% are owner-occupied on a mortgage. The balance are social housing and the private rented sector. With almost half of all UK properties owned mortgage free, what levers can government pull to encourage all property owners to take action to drive energy efficiency? Who will bear the cost on leasehold properties particularly those that may not have enough time left on the lease for them to seen as “investable”? What is the role of landlords versus tenants with a shared benefit of lower heating costs versus preserved capital value.
By way of background, in June 2019 the UK became the first major economy to pass a net zero emissions target into law requiring the UK to bring all greenhouse gas emissions to net zero by 2050. The UK’s stretching interim emission reduction targets, the Carbon Budgets, require the equivalent of a 57% reduction in emissions relative to 1990 levels from across the UK economy by 2032. Whilst lower than 1990 levels, homes in the UK still made up 15% of greenhouse gas emissions in 2018, or 22% if electricity consumption is included. The government recognises that, in order to achieve net zero, we need to have largely eliminated emissions from our housing stock by 2050. This requires a suite of policy proposals for existing homes as well as new standards for the building sector.
Government work to date acknowledges the risk that owners (mortgagors) of properties with lower energy performance are priced out of improving the energy performance of their homes as many borrow the maximum that they can afford and any additional loan to fund energy improvement measures would be unaffordable. Those people may find themselves ineligible for preferential rates at the end of their incentive period and may be forced onto the standard variable rate. However, a further issue that we are all facing into is what is to be done about the more than 10 million existing UK residential properties which do not meet the new minimum required standards of Energy Performances Certificates. These are the houses that need to be improved.
The logic of investing is hard to see for individual homeowners because of the perceived “pay-back periods” due to the likely costs of improving your home. The work needed to bring a home up to B EPC standard or better is now perceived as, on average, more than £20,000 for most properties at grade E or below. The annual cash savings on energy bills makes the pay-back period on this investment longer than 20 years. So, most people do not see this as in their interests. In addition, as energy costs in the UK surge, people struggle to see the gains moving away from gas to electricity.
In 2014, the government introduced a fuel poverty target for England to improve as many fuel poor homes, as is practicable, to a minimum energy rating of EPC band C by the end of 2030. Support is provided to homeowners, private rented sector tenants and social housing tenants living in or at risk of fuel poverty under the Energy Company Obligations and Warm Home Discount schemes. However, this has not had the take-up envisaged. Limited publicity and a lack of advocates talking to those impacted has limited adoption.
Mortgagors in fuel poverty and those just over the threshold will need to be protected from any adverse effects from these proposals. Affordability checks will help but the government is looking for other methods too. The need for significant government investment has never been greater at the same time as the economy looks like it needs a post-Covid rebalance.
First time buyers
These proposals could make the purchase of second-hand homes less affordable for first time buyers or price changes may mean that FTBs can only afford lower performing properties. As we see the phasing out of Help-to-Buy a government who wants to help people into home ownership while maintaining the ambition of these proposals,they will have to make challenging decisions on how to preserve the UK housing market.
Mortgage Market impacts
The screaming need for change will present difficulties with a real risk of delays to mortgage processes due to the requirement of a current and valid EPC – particularly with product transfers and remortgages. Lending to energy inefficient properties risks becoming disincentivised or their values may drop. All of this could mean that consumers are dissuaded from moving lenders to avoid having to face into the upgrades required. Lender capabilities and costs of complying with disclosure requirements will add to pricing and may influence the types of products they can offer. Indeed, one Building Society Chair recently opined that lenders may have to consider not lending on the lowest rated properties.
Fabric first – This and a cost effectiveness principle inform the way the recommendations on the EPC are generated: 1) insulation, 2) heating and hot water, 3) windows and doors upgrades, and 4) electricity generation measures. Improving the thermal performance of buildings prior to installing/transitioning to low carbon heating is a necessity and will reduce energy demand as well as overall size and costs of the energy system.
The world of New Build
In addition to the EPC changes being brought in, government has been legislating on a new set of standards of construction. This will be the real start of the green agenda. Newly built house will have to adhere to these new rules which will effectively mandate higher insulation standards, new technology for heating and the need for the build to be carbon neutral. This will mean that from 2025 newly constructed properties will have to meet these new green standard but also meet higher inspection and quality levels. All of this will undoubtedly increase build times and costs.
This potentially will have a pull effect on the price of second-hand properties as they will always move in line with new prices. This may come to the rescue of those who need to borrow to improve, but only time will tell. Lenders views on affordability linked to the savings on energy and the protection of the capital value of the property will be an interesting conundrum.
To add to the complexity, previous quality and timeliness issues within this sector has led to the establishment of the New Homes Quality Board (NHQB). This new independent entity is a piece of industry self-governance, forced by government, which will deliver a new set of rules and standards, to drive better quality in the private housebuilding sector. Not only will it effectively set new rules for snagging, inspections and completion, it will operate a complaints and Ombudsman service for those that are dissatisfied.
The NHQB has said that its role is to fill the gaps of existing protections for owners of newly built homes. It will be chaired by Dover MP Natalie Elphicke, with representatives from the housebuilding, banking, building control and consumer bodies on the board
Builders who regularly fail to meet the expectations of this new body will risk losing their membership and therefore it will be clear to consumers that they do not meet baseline standards.
Because the ways in which energy efficiency can be improved is so multi-faceted, it is complicated for the ordinary consumer to know what might work best for them. As already stated, whether it is solar power, insulation, glazing, boiler and heating types, white goods, or turning down the heating and wearing a jumper; solutions are multi-dimensional.
Intermediaries will play an important role in highlighting any issues to customers and ensuring that they apply for any remortgage or product transfer in good time. Indeed it is likely that both government and lenders will see the mortgage intermediary as the key route to educate the public on these changes,
Current plans are to use lenders to drive change as people sell or remortgage. This however means having to wait for sale of many properties to engineer change. This may mean that the UK targets will not be met.
The next few years will set the tone and speed of this revolution – and whether the UK and meet its obligations.
AMI, October 2021