Scotland's Sustainable Housing Strategy: Analysis of Responses to 'Homes that Don't Cost the Earth' Consultation
The report summarises the responses to the consultation on Scotland's Sustainable Housing Strategy which sought views on measures to promote the energy efficiency of housing
4 Analysis of Responses: Financial Market Transformation
4.1 Questions 34 to 37 addressed the ways in which financial institutions could be persuaded to recognise the value of energy efficient homes. This included: legislative and policy levers to transform the valuation of housing to take account of energy efficiency and sustainability, changes to survey and lending practice, challenges to such valuation, and Scottish Government action to encourage recognition of the value of sustainable homes.
4.2 The Council for Mortgage Lenders did not directly respond to the questions but made a general statement which largely relates to questions 35 and 36.
4.3 Over half the respondents answered Q34 a) (60%); the response was divided with over half answering 'Yes' (55%), who were mostly in the RSL and local authority groups. Over a third answered 'No' (36%), with high proportions of the private, professional, and 'other' groups.
4.4 Over half the respondents answered Q34 b) (60%), with a low response rate in the RSL group. Over a quarter of these advocated incentives in the form of links to council tax and / or Land and Building Transaction Tax.
4.5 A few commented on valuation and mortgage lending practice to take account of income from energy generating technologies or savings due to energy efficiency. Some referred to RICS as being best placed to comment, but RICS was in the process of reviewing its own guidance on valuing sustainability in homes and did not respond to this question. Some pointed to the value of housing being determined by broader supply and demand factors, not running costs and that the EPC rating does not yet impact on value. Some called for green mortgages linked to lower utility costs. However, most pointed to a lack of incentive to invest in energy efficiency without a change in valuation practice, or rent setting in the private sector.
4.6 Some suggested other measures: awareness raising, demonstration, and market research. Suggestions included expanding the EST Green Homes network to include many more energy upgrades of existing homes - and showcasing energy efficiency upgrades of buildings by public, private and third sector employers; and market research to establish what customers were looking for and what would influence their decisions. Other suggestions not mentioned in earlier questions[13] included the 'Home Energy Score' used in America which compares the home with other similar homes in the surrounding streets to encourage 'environmental competition' between neighbours; and a TV programme on finding homes called 'Energy efficient, Energy efficient, Energy efficient!'
4.7 The private sector called for measures to boost new build: a new buy incentive; making more green sites available for one-off new build energy efficient properties, and speeding up the planning process for the building of such houses.
4.8 Some suggestions concern reserved matters, such as lobbying HMRC for fiscal incentives; tax relief for owners to off-set the costs of maintenance; tax breaks or reductions on insulation, energy, monitoring and micro-generation products; and VAT reduction or zero rating on improvement works to existing buildings. There could be mandatory contributions to a sinking fund for repairs or improvements at point of purchase as a condition of mortgage lending.
4.9 There was considerable pessimism about funding options, particularly about the Green Deal because of delays in its introduction, high loan costs, and adding costs to house sales, and uncertainty about future fuel bills. One private sector respondent commented that little thought had been given to asset rich, cash poor property owners and that it was unlikely that this group would wish to re-mortgage for energy efficiency paybacks that might take years to materialise.
4.10 The Chartered Institute for Housing (CIH) considered faith in equity release to be misplaced, with few appropriate products available even when the housing market was buoyant. CIH considered that home equity would remain largely untapped without a national lending unit to provide loans to home owners for repairs, improvements or adaptations that would be repaid on sale. This might prevent social landlords from achieving the SHQS in mixed tenure blocks, and affect the ability of home owners to meet minimum standards.
4.11 Set against the vision of beneficial market transformation whereby consumers would realise the value of energy efficient homes, invest in improving their own properties, and consider energy efficiency when buying new homes, was a concern from one of the 'other' group organisations, that fuel-efficient housing would attract a premium, either on rents or house prices, that would widen inequalities by making such housing less affordable.
4.12 Over half the respondents answered Q35 (56%).
4.13 The Council of Mortgage Lenders discussed lenders' consideration of disposable income, noting that the FSA consultation on responsible lending rules (consultation closed November 2012) included proposed requirements for lenders to verify income. However, with regard to income from new technology or savings on energy bills:
"Unless the savings are significant it is highly unlikely that they will materially impact on the amount which the customer can borrow. It should be emphasised that savings made through lifestyle changes cannot be considered as there is no guarantee that these changes and any benefit derived will be sustained. While energy efficiency measures are likely to have a positive impact on disposable income it has to be borne in mind that the repair, maintenance and replacement costs of some of the new technologies associated with energy efficiency can be significant." – Council of Mortgage Lenders
4.14 Apart from the CML, issues raised across all respondent types were the training of surveyors and lenders, consideration of running costs and whole life costs, and the calculation of mortgage offers and valuations. However several respondents thought consideration of income and savings would be impractical, have little effect, or would not be appropriate.
4.15 The most common call was for more specialised training for surveyors to value the monetary impacts of energy efficiency measures for occupants, together with increased awareness on the part of lenders. One view was that surveyors operated on comparators and this approach was unlikely to generate higher values unless there was a recognisable impact on council tax bandings or actual increased mortgageability of greener homes.
4.16 Many called for mortgage lenders to take account of reduced expenditure on energy in the calculation of mortgage offers and valuation of energy efficient housing as it would mean greater affordability for the household acquiring the property, or for a discount on lending rates based on the level of energy efficiency, both to buy a new home or to re-mortgage to release funds for retrofitting. Valuations were seen as a particular problem of new build, where the new home market had seen a fall in values over the last 4 years and there was no value recognition for greener homes and places. The private sector saw it as key both to get people demanding energy efficiency, and to persuade the surveying and lending community to recognise that a purchaser of a new or greener home was less exposed to rising fuel costs than in a second hand home. Consumer Focus Scotland pointed to research demonstrating consumer concerns about both energy and council tax bills, both of which should be taken into account by lenders. Also, in the affordable housing sector, affordability should consider energy costs:
"Meeting fuel costs are a key and volatile part of the assessment of the affordability of a home. It would be useful to explore a "full housing costs" approach to assessing affordability" – 'Other' group
4.17 Set against this, others described difficulties in accurate assessment of the value of energy efficiency measures. Some queried the value of certain technologies with steep depreciation rates, and pointed to equipment that was under-delivering and to maintenance and replacement costs that could impact negatively on the value of the home. Others referred to difficulties in establishing actual savings, given that SAP was based on assumed uses rather than actual spend. Also, income from new technology was not guaranteed, so it was difficult for lenders and surveyors to place a set value on it - there would need to be guarantees about income and minimum performance of the technology to enable mortgage lenders to take these into account.
4.18 In a free market economy only the market would decide if energy efficient homes should attract a higher re-sale value. There was nervousness amongst surveyors about the judgements they make on the value of a home, stemming from the risk averseness of lenders. Although savings on fuel bills could make a house more attractive, buyers might not be willing to pay a great deal more.
4.19 The Council for Mortgage Lenders also noted that green mortgages had been developed, but there were few lenders offering such products as the commercial benefits of doing so were not clear. There was also mention of property purchase schemes, suggesting that the availability of the Open Market Shared Equity and MI New Home schemes[14] should be restricted to properties with high EPC ratings.
4.20 Many respondents suggested information measures to raise the profile of energy efficient housing, such as projected FiT or RHI payments, inclusion of recent bills in Home Report packs, and benchmark comparisons with typical bills for similar properties.
Q36 Section 3.15 lists a range of challenges that may prevent the benefits of a more sustainable, energy efficient home being fully recognised in its value. What further challenges, if any, need to be addressed?
4.21 The consultation listed challenges: a risk-averse lending market with assessment based on household income, but taking little account of house condition or energy efficiency; lenders who operate across the UK not fully recognising Scottish-specific circumstances; uncertainty about how the Green Deal would be received and how it might affect property values; lack of information or proven examples of how an incentive structure could support behaviour change; and lack of familiarity with new technology such as heat pumps and solar PV.
4.22 Over half the respondents answered question 36 (60%), with a particularly high response rate in the professional group. A fifth of these respondents, including the RICS, thought the list was comprehensive or suggested that RICS and the mortgage lenders were best placed to answer this question. Other respondents raised further challenges: professionals' knowledge / awareness, consumer information, consumer perception and values, mis-selling and quality of installations, complexity of regulation and funding schemes, legislative impediments, and affordability.
4.23 Many comments addressed attitudinal change. As well as comments similar to those for question 35, there were calls for the Bank of England and the Scottish Government to encourage greater support by banks for lending for energy efficient homes, and for continued high level engagement with CML and RICS. The Energy Saving Trust drew attention to a forthcoming study of solicitors', estate agents', surveyors' and home buyers' attitudes to energy efficiency and small-scale renewables. According to this study, as well as the professionals' belief that home buyers were not interested in these issues, home buyers themselves reported that they had limited understanding of the potential benefits, had limited budgets, feared that technologies would become out of date, and that they did not envisage living in a property long enough to recoup long-term benefits. The CML did not believe that lenders or surveyors could lead consumer perceptions and values. WWF suggested there was a need to engage with householders and explore motivations to behaviour change that make people feel good about themselves and their actions - rather than just saving money.
4.24 Respondents identified a need to build confidence, following reputational damage by under-performing or over-stated benefits of new technologies, and by mis-selling. Consumers needed to have faith that their investment would deliver and to trust installers. A local authority referred to poor quality or inappropriate retrofit installations that had rendered properties below tolerable standard and depressed their value. There were also calls to raise awareness of industry accreditation schemes that provide assurance of high standards of work by suitably skilled and properly accredited contractors. One respondent suggested that technologies should only be installed if they had a proven track record and were supported by local maintenance contractors. There was a fear of uncertainty caused by any further regulation and the complexity of existing funding, with schemes that were subject to change. One respondent suggested that qualified professionals were baffled by the range of subsidies and technologies, and that the average householder would be confused. RSL, local authority, and professional respondents noted that planning restrictions limited both energy efficiency improvements to homes in conservation areas, and district heating systems in urban areas.
4.25 Other comments concerned affordability, for instance energy savings offset by increased rents, or negative equity making people unable or unprepared to invest in improved energy efficiency measures. While subsidies were needed to make measures affordable for people on low incomes, those with higher incomes might decide to pay penalties rather than undertake disruptive works.
Q37 a) Sections 3.16-3.22 set out the action that Scottish Government is currently developing to encourage greater recognition of the value of sustainable homes. Do you agree that this action is appropriate? b) What further action is needed to influence consumers and the market?
4.26 Sections 3.16-3.22 referred to: working with key partners to change perceptions and practice in lending and surveying; raising expectations through building standards; providing information, evidence and case studies of low carbon housing and insulation measures; researching how to encourage sustainable behaviours at the individual, social, and material level; a public information campaign on climate change; and the Greener Scotland website.
4.27 Two thirds of respondents answered question 37 a) (66%), with high response rates amongst the local authority and 'other' groups. Most answered 'Yes' (80%), including almost all in the RSL, local authority, and professional groups.
4.28 Two thirds of respondents answered question 37 b) (67%), with high rates of response in the local authority, and professional groups.
4.29 One of the professional group commented on purchaser demand as the key influence on value:
"Customers looking to purchase a property will place their own recognition on the value of more sustainable home. The market is reflected by demand, not supply." – RICS Scotland
4.30 Most respondents called for information to influence consumers- particularly owner occupiers - with messaging that highlighted lifestyle and wellbeing, Scottish pride, success, meeting a challenge and succeeding. There was a need for independent, robust evidence of improved value and discussion of cost benefits, and good practice examples. Examples cited included the Green Homes Network, BRE's Innovation Park, the Greener Homes Innovation Scheme, RSL Passivhaus projects, biomass district heating, locally sourced fuel systems, and Scottish low energy housing systems, including Sigma, IQ-System, Val-U-Therm and Makar. Large scale exemplars of mainstream housing were needed, not just one-off and self-build projects.
4.31 Some referred to the need to drive change in the construction industry, to set robust standards, and for financial incentives. Suggestions to drive change in the construction industry included: encouraging builders to adopt new practices, technology, and marketing; tackling poor practice in door to door selling; work with the DIY sector and small builders to raise awareness; and reducing product costs through innovation and collaborative working. One private sector respondent recommended the simplification of energy assessor training, suggesting a merging of qualifications relating to new build and existing buildings.
4.32 There were also calls for robust and demanding standards –
"... it would send the wrong signal to householders if the Scottish Government stepped back from the recommendations in the Sullivan Report on new build standards. Strong and ambitious building standards will drive innovation, quality, and a reputation for low carbon building – anything less and Scotland will not be able to capitalise on this economic opportunity." – Age Scotland, WWF Scotland, Existing Homes Alliance, Association for Conservation of Energy
4.33 In addition to the familiar calls for financial incentives through variances in Stamp Duty / LBTT and council tax, there were calls for suitable tariffs for air source heat pumps in off-gas areas, and subsidisation of energy efficient measures / appliances so that they were more affordable than alternatives. There were calls for discounted / green mortgages by several respondents.
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