Published 27th October 2021
This question has been widely discussed during the past few weeks. Recent research from Halifax suggests that properties with a higher energy efficiency rating can achieve an average price premium of up to £40,000. Moving a property from band G to F will on average increase value by 3.8%. Similarly, Rightmove says that sellers who have made energy efficiency upgrades and increased their EPC grade to a C (from D or G) achieve up to a 16% higher sale price.
However, research conducted by Nationwide’s senior economist Andrew Harvey provides a conflicting message that energy efficiency only has a modest influence on property value. Harvey says that upgrading a property from band D to A or B only results in value uplift of around 1.7%, far below Halifax and Rightmove’s findings.
How do we find the truth amongst the clashing data? While all three pieces of research agree that energy efficiency has some impact on value, is it hefty or modest?
Generally speaking, the most reliable way to predict the future is to look at the past to analyse historical trends and relationships that will hold true in the future. This approach is used extensively across many fields including Big Tech (from Amazon to Facebook), airplane procurement (2 year delivery times require solid predictions of future demand for air travel), and election polling.
The issue with using past behaviour to predict the future is that large external shocks can render carefully modelled conclusions useless. The change in voting behaviour from the traditional left/right split to Brexit/remain caused systematic errors across polling in the UK resulting in consistent “election shocks” over the past few years. The crash in demand for international travel during the pandemic has completely changed in a much shorter time period than aircraft construction adheres to.
Energy efficiency in housing is going through the sort of fundamental market shift that could leave past historical trends behind. Regulation is fast coming down the pipe from the government who are legally and vocally committed to carbon net zero by 2050 and know that housing accounts for 22% of the UK’s emissions. Simultaneously, consumer and investor demand for green sustainable products and assets has been described as “ravenous” by the Financial Times. The Minimum Energy Efficiency of Buildings Bill will give the private sector a much larger obligation in the path towards Net Zero. To date, there have been no similar grand announcements on funding and without state support, this legislation is likely to have a huge impact on market pricing.
Quite simply, the impact of energy efficiency on value has historically been driven by the tradeoff between up front investment to upgrade properties and recouping that money over time through lower utility bills. That relationship is on the cusp of being torn apart and replaced by legislative requirements and public pressure. The old data therefore cannot tell us much about the future effect of energy efficiency on value.
In order for banks to achieve an average of EPC C by 2030, mortgages on inefficient homes will almost certainly become more expensive (many lenders already offer cheaper green mortgages). Whilst there is a huge opportunity for lenders to offer substantial green lending, the incoming legislative changes may also lead to mortgage prisoners (who cannot switch mortgages due to low energy efficiency and therefore value) and, in turn, stranded assets on back books as property values change leaving some owners in negative equity.
If MEES increases to C, almost 60% of housing stock will no longer be legally lettable. Landlords will either have to spend up to £10k on retrofits, equating to a total of £29 billion across the PRS, sell their properties, or take them off the market. This could lead to a dramatic rise in mortgage arrears events as landlords struggle to keep up their payments, and a surfeit of inefficient stock entering the market that cannot be lent against, further pushing down prices. If only the top 42% most efficient properties in the country can be legally let, they can expect to command a high premium.
The potential for “mortgage prisoners” has led to some calling for a more nuanced policy, one that would go beyond penalising owners of inefficient properties, to instead incentivising them to upgrade. In this scenario, potential homeowners would be asked to take out larger mortgages, at preferential green rates, to fund improvements. This offers cheaper access to capital, and immediate opportunities to start recouping the investment through cheaper energy bills. This solution could avoid the hard shock to house prices of immediately defining a large swathe as undesirable from a lender’s perspective.
A recent study by NatWest estimates that only around 30% of house buyers believed a property’s EPC rating was important when buying a property. With such a noticeable proportion of homeowners not considering EPC ratings as important, it is hugely important that people are educated on the risks of incoming legislation. It may well be that lack of awareness is reducing the link between energy efficiency and property value which will result in a painful correction when legislation hits.
In any scenario, the current debate over whether energy efficiency affects property value will become increasingly irrelevant if or when these legislative changes start to bite. In this sense energy efficiency is not a driver of value per se, but a safeguard against the risks associated with a raft of marketing-defining legislation.
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