The recent COP27 climate summit in Sharm El-Sheikh was a stark reminder as to the vast challenges that lay ahead in tackling the global issue of climate change.
Closer to home, the housing and mortgage market also faces its own difficulties when it comes to upgrading the UK’s housing stock – starting first with the reform of Energy Performance Certificates (EPCs).
UK Finance recently argued in its Net Zero Homes report that the EPC in its current form is not fit for purpose – a view shared by many others. Before we can move to decarbonise our housing stock, we must first solve the problem of the EPC.
One of the biggest difficulties with the current domestic EPC is the way in which it is calculated. It rates a property based on the cost of its energy usage.
So, while a property may reduce its carbon output this does not necessarily translate into a lower EPC.
This makes it confusing for homeowners who are looking to implement energy efficiency measures. Installing a heat pump, for example, may reduce the carbon output of a property but does not always result in cheaper energy bills.
Changes to the EPC are believed to be in the pipeline before 2025 and the current methodology is something we hope will be addressed. Change needs to happen swiftly however, as time is not on the industry’s side.
The Government is still believed to be keen to stick to its timeline of requiring all rental properties to carry an EPC C rating for new tenancies by 2025 and for lenders to try and improve their portfolios to an average C band by 2030. If so, this will need an accelerated effort from all parties – most of all the Government.
UK Finance estimates that 16.7 million properties in the UK have an EPC rating of below C. To bring all properties to EPC band C by 2035 will require retrofitting measures to be applied to 1,285,000 homes per year, equating to more than 3,500 retrofits per day. To add some context, only 200,000 homes received energy efficiency installations in 2021, just 15% of annual installations required.
For 3,500 retrofits per day to be undertaken, there can be no room for error in the complete supply chain. Identifying, installing and funding the necessary changes to a property are all going to have to work seamlessly together across the organisations and parties involved. Our surveyors are currently training to become energy assessors in anticipation of the task before us.
UK Finance would like to see a Government-backed Retrofit Advisory Service set up to provide homeowners with retrofitting information and advice, alongside the funding options available. It is also calling for a property’s EPC to be digitally updated in ‘real-time’ – something which would help lenders more accurately assess the EPC ratings of the properties in their portfolio.
The current EPC lasts for ten years with little to no incentive currently for homeowners to update theirs – even if renovation work is carried out. One way to tackle this could be for a minimum energy efficiency rating to be required for the sale or remortgage of a property. This is something UK Finance would like to see rolled out from 2030.
Even with the logistics of the EPC in place, one big question remains – who will foot the bill? The trade body estimates the total cost of the upgrading the entire UK housing stock to EPC band C will be £249.5 billion.
Government has demonstrated post-pandemic that the ‘just spending our way out of a problem’ mentality is not going to work and is now attempting to balance the books. While for lenders, that sum of money is collectively a year’s worth of gross lending.
Some suggestions from UK Finance include a Stamp Duty rebate for those who have carried out energy efficiency improvements within two years of buying their property. It would also like to see Government provide targeted grants and subsidies that cover the full upfront cost of retrofitting for certain vulnerable populations. For those with a greater ability to pay, the trade body suggests a means-based approach is taken.
It also suggests the Government should consider if it could better support environmental-linked securities through a wrapper or guarantee to reduce the risk for lenders and provide low-cost loans for consumers.
Such issues are not easily solved and will take time, effort and considerable investment. The task at hand could also mean significant change for the mortgage market over the next decade as retrofitting homes takes more of a priority.
Simon Jackson is chief executive officer of MSSÂ
