Landlords up against it with EPC requirements

First published by Financial Reporter

Does ‘The Budget’ actually present anything new for the UK housing market?

The Budget came and went, and while there might not have been anything in it to rejoice about as a housing market industry stakeholder, there was certainly plenty to furrow the brow and wonder whether the announcements we heard were actually anything new or just a repeat of those already made.

Rishi Sunak made a fairly big deal about the ‘new’ £24bn housing settlement but I believe the £11.5bn announced for 180,000 ‘new’ affordable homes was announced by the previous Housing Secretary.

Perhaps of more interest, especially given recent Government announcements in this area, will be just how energy efficient those 180,000 new homes will be? After all, the pressure is on to meet the net zero carbon emission target and we don’t really seem to have started tackling the UK housing stock – one of the biggest sources of emissions.

EPC improvements to hit the rental market hard

In the week before the Budget, there was a focus on lenders being transparent about the EPC levels of the stock they lend on, a focus on improving EPC levels across the board and grants for heat pumps, but my view is that it’s going to need the Government to go much further, faster, in order to truly tackle this.

One of the major factors overlooked in this, from my perspective, is the role of the UK private rental sector and what landlords are being expected to do to improve the energy efficiency of their homes, and what that might lead to in terms of unforeseen consequences for the housing market overall.

As you are likely to know, all rental properties must have at least an EPC rating of E now before they can be let to domestic tenants, and from the beginning of 2025 this will rise to a level of C, although existing tenancies will have until 2028 to comply.

Is the cost worth the gain for prospective landlords?

This presents something of a challenge because making such an improvement is unlikely to come cheap. Grants of £5k to just 90,000 homeowners when the overall cost to install a heat pump is more likely to be £25k are already a drop in the ocean, and this is likely to mean landlords will have some serious thinking to do over the next few years about how they move forward.

Firstly, how might they cover the costs of this retrospective action to improve their property’s energy efficiency? They could raise rents but this is likely to put them out of kilter with their local rental market. They could raise the money on the mortgage but they will have to wait to sell in order to recoup and they might not make this money back anyway.

Or they might feel that the costs of moving properties from ratings of D and E, up to C, are too great and decide to sell because there is nothing stopping them from selling such properties, they just won’t be able to let them out.

Renters to face the brunt of the burden?

Now some might see this as a positive. Rental property coming to market increases the supply of property to sell and it’s these properties that are likely to appeal to first-timers. However, stock moving from the rental sector into owner-occupation tightens the supply to renters considerably, and when supply is constricted, you can bet your bottom dollar that rents will go up. Tenants will be paying more.

The inter-connectedness of our market is often overlooked in such matters. Government tends to work in silos not quite fully understanding that if you press a lever in one part of the market, it moves other levers elsewhere.

Not enough incentivise homeowners into action

It will be interesting to see what landlords do, because they are going to have to make these decisions well before homeowners do so, and if they decide it’s not worth their while to make the improvements necessary to their stock, then it’s more likely that homeowners themselves will also think the same.

Of course, you might argue that eventually all property owners will have to do this, but currently there is very little stick if no action is taken, and the carrot is a very small snack at best. And that’s before you get into what might be required in terms of commercial property – the carbon footprint of which is likely to far outweigh that generated by a house.

It is a complicated and complex issue to tackle but time is running out, and it can’t really be kicked into the long grass anymore. A joined-up approach is required otherwise there is little chance of those targets being met, and I think we’re all acutely aware of what the potential consequences of that might be.

Simon Jackson is managing director at SDL Surveying

 

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