Government acknowledges the EPC rating system needs fixing

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The government’s controversial policy of phasing out natural gas boilers in favour of heat pumps, in its drive to meet internationally agreed energy efficiency targets, could be stymied because of an out of date EPC algorithm.

Regardless of the fact that many older poorly insulated properties would be unsuited to heat pumps, fitting one with the current method of calculating a property’s energy efficiency rating could mean that a property with an EPC rating of C would be pushed to a D.

Currently there are some rather bizarre outcomes to the EPC system that need to be tackled if the above targets are to hold any credence with property owners and energy specialists and the Government have acknowledged this.

Heat pumps use more electricity

The problem is that heat pumps use electricity which is more expensive than natural gas. The same goes for a property heated by LPG (Liquefied Petroleum Gas) which as a gas is more expensive than mains gas. The EPC system currently incentivises the use of mains gas over electricity or LPG on a cost basis.

Tom Spurrier, of the UK Green Building Council, a leading industry body, has said:

“We have currently got a metric that incentivises gas because it is cheaper.” If you install a heat pump, which is powered by electricity, your EPC rating may actually fall. Properties with Liquid Petroleum Gas (LPG) are also marked down because the gas is more expensive than mains gas.

One Whitehall source told The Daily Telegraph: “We are aware of this problem and it is being reviewed.”

The Conservative MP Craig Mackinlay, the chairman of the Net Zero Scrutiny group, said:

“Given that heat pumps can actually increase energy use, on which EPC certification is derived, they could push a property that might have been rated C under an old method into D. That could make it both unrentable and possibly even unsaleable, if some of the more nonsensical Net Zero measures that we hear about are realised.”

Headlong drive to net zero

Cabinet ministers have expressed concerns about the speed the Government is going with its transition to net zero. Households and businesses a concerned about the costs this will introduce at a time when gas shortages are resulting in record energy price increases – it could be the biggest cost-of-living squeeze in a generation.

Energy Performance Certificates (EPC) grades are likely to mandated at a minimum of “C” for rental properties in the near future from the present grade “E” and the rating is increasingly being tied to property prices and mortgage approvals.

Property values influenced by EPC ratings

Research by the price comparison website Moneysupermarket shows that by improving a property’s energy rating from G to A can increase its value by as much as 14 per cent.

The way that the ratings are currently estimated, based on a formula arrived at in 2012, means that by moving away from natural gas to so called “energy efficient systems” could result in properties becoming unsaleable and unlettable.

Currently the EPC calculations estimate what it costs to heat a home, rather than the carbon emissions a heating system produces. Heat pumps whether air source or ground source produce less CO2 than a gas boiler, but they are not necessarily recorded cheaper to run.

A ground source heat pump, which is more efficient than an air source system, can cost up to £25,000 and is currently the only mainstream alternative to a gas boiler, though the Government is experimenting with switching natural gas boilers to burn hydrogen.

Few alternatives to natural gas

Rishi Sunak, the Chancellor, and Kwasi Kwarteng, the Business Secretary, have both pushed back on a headlong dive into renewable sources and heat pump conversions, arguing that the UK should continue to rely on natural gas production as the country moves towards net zero with the 2050 target.

The EPC system was drawn up in 2007 as a way of nudging property owners into making their houses more efficient. It has become increasingly important over time, with lenders such as Natwest now offering so-called green mortgages with cheaper rates for properties graded A or B.

Not fit for purpose

Nicholas Mendes, the mortgage technical manager at John Charcol, has said that the current EPC system is “not fit for purpose” as the green ratings have now became crucial in lenders’ mortgage calculations:

“Having an A, B, or C EPC rating will no longer be a unique selling point, but the expectation. Whether you’re purchasing or remortgaging, be prepared, as we could see the best rates be for green mortgages in the future,” Mr Mendes says.

A Government spokesman for the Business Department told The Daily Telegraph:

“Energy Performance Certificates provide useful guidance for consumers and businesses outlining how energy efficient buildings are in a simple and comparable manner.

“We are already looking at ways the system can be improved through our EPC Action Plan to ensure they are as accurate and effective as possible.”

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OPINION: Why the EPC rating system needs fixing

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The government’s controversial policy of phasing out natural gas boilers in favour of heat pumps, in its drive to meet internationally agreed energy efficiency targets, could be stymied because of an out of date EPC algorithm.

Regardless of the fact that many older poorly insulated properties would be unsuited to heat pumps, fitting one with the current method of calculating a property’s energy efficiency rating could mean that a property with an EPC rating of C would be pushed to a D.

Currently there are some rather bizarre outcomes to the EPC system that need to be tackled if the above targets are to hold any credence with property owners and energy specialists and the Government have acknowledged this.

Heat pumps use more electricity

The problem is that heat pumps use electricity which is more expensive than natural gas. The same goes for a property heated by LPG (Liquefied Petroleum Gas) which as a gas is more expensive than mains gas. The EPC system currently incentivises the use of mains gas over electricity or LPG on a cost basis.

Tom Spurrier, of the UK Green Building Council, a leading industry body, has said:

“We have currently got a metric that incentivises gas because it is cheaper.” If you install a heat pump, which is powered by electricity, your EPC rating may actually fall. Properties with Liquid Petroleum Gas (LPG) are also marked down because the gas is more expensive than mains gas.

One Whitehall source told The Daily Telegraph: “We are aware of this problem and it is being reviewed.”

The Conservative MP Craig Mackinlay, the chairman of the Net Zero Scrutiny group, said:

“Given that heat pumps can actually increase energy use, on which EPC certification is derived, they could push a property that might have been rated C under an old method into D. That could make it both unrentable and possibly even unsaleable, if some of the more nonsensical Net Zero measures that we hear about are realised.”

Headlong drive to net zero

Cabinet ministers have expressed concerns about the speed the Government is going with its transition to net zero. Households and businesses a concerned about the costs this will introduce at a time when gas shortages are resulting in record energy price increases – it could be the biggest cost-of-living squeeze in a generation.

Energy Performance Certificates (EPC) grades are likely to mandated at a minimum of “C” for rental properties in the near future from the present grade “E” and the rating is increasingly being tied to property prices and mortgage approvals.

Property values influenced by EPC ratings

Research by the price comparison website Moneysupermarket shows that by improving a property’s energy rating from G to A can increase its value by as much as 14 per cent.

The way that the ratings are currently estimated, based on a formula arrived at in 2012, means that by moving away from natural gas to so called “energy efficient systems” could result in properties becoming unsaleable and unlettable.

Currently the EPC calculations estimate what it costs to heat a home, rather than the carbon emissions a heating system produces. Heat pumps whether air source or ground source produce less CO2 than a gas boiler, but they are not necessarily recorded cheaper to run.

A ground source heat pump, which is more efficient than an air source system, can cost up to £25,000 and is currently the only mainstream alternative to a gas boiler, though the Government is experimenting with switching natural gas boilers to burn hydrogen.

Few alternatives to natural gas

Rishi Sunak, the Chancellor, and Kwasi Kwarteng, the Business Secretary, have both pushed back on a headlong dive into renewable sources and heat pump conversions, arguing that the UK should continue to rely on natural gas production as the country moves towards net zero with the 2050 target.

The EPC system was drawn up in 2007 as a way of nudging property owners into making their houses more efficient. It has become increasingly important over time, with lenders such as Natwest now offering so-called green mortgages with cheaper rates for properties graded A or B.

Not fit for purpose

Nicholas Mendes, the mortgage technical manager at John Charcol, has said that the current EPC system is “not fit for purpose” as the green ratings have now became crucial in lenders’ mortgage calculations:

“Having an A, B, or C EPC rating will no longer be a unique selling point, but the expectation. Whether you’re purchasing or remortgaging, be prepared, as we could see the best rates be for green mortgages in the future,” Mr Mendes says.

A Government spokesman for the Business Department told The Daily Telegraph:

“Energy Performance Certificates provide useful guidance for consumers and businesses outlining how energy efficient buildings are in a simple and comparable manner.

“We are already looking at ways the system can be improved through our EPC Action Plan to ensure they are as accurate and effective as possible.”

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AIRBNB: Westminster to step-up war against ‘nuisance’ short-term lets landlords

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Westminster Council has launched a spirited campaign to stop central London being overrun by nuisance short-term lets booked chiefly through Airbnb.

It is lobbying the government to follow Paris and Amsterdam’s lead whose authorities have clamped down on problem properties.

Westminster wants the power to fine owners whose lets create anti-social behaviour and to introduce exemptions for high impact areas which can’t cope with such high numbers.

The council says short-term letting occurs on an industrial scale in the city where more than 13,000 properties are available on sites such as Airbnb but also Booking.com.

2,000 breaches

Almost one in three of its residents in the West End complain that irresponsible short-term letting is a problem in the area and its team is currently investigating 2,000 breaches of short-term let rules.

Ahead of proposed renting reforms mentioned in the government’s Levelling Up White Paper which are likely to include a national landlord register, Westminster wants short-term letting companies to introduce registration schemes.

Council leader Rachael Robathan (pictured) says that while some properties are let responsibly, many are not and these result in noise, illegal dumping, antisocial behaviour and sometimes criminal activity.

She adds: “Many short-term let properties are causing a strain on council resources and making life hell for many of our residents who constantly complain to us about the detrimental effect they are having.

“We need more restrictions and powers given to us as a local authority to tackle short-term letting anti-social behaviour impacting our communities.”

Westminster Council is already tough on the PRS and operates a Housing Standards Taskforce and an online rent repayment checker for tenants to check if their HMO is licenced and to help them claim back rent.

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BREAKING: Rental sector ‘boom’ drives tenancy voids to five-year low

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Landlords are experiencing their lowest void periods for the last five years, after peaking at 39% during the third quarter of 2020.

Levels have steadily dropped during the last 18 months and now just 25% have had empty rental properties during the previous three months, according to Paragon Bank’s latest research.

Its survey of 800 landlords, undertaken by BVA BDRC, found that this fall was driven by a reduction in those with six or more properties who had one of their rental properties vacant.

Paragon says landlords in Wales had the largest number of recent void periods, with 39% facing at least one empty let, compared with the South West and East of England where only 23% of landlords reported voids.

Turnaround

Central London has seen the greatest turnaround – further evidence of the capital’s rental market resurgence.

In Q3 2020, 68% of central London landlords recorded a void period, the highest proportion of any region, which has now fallen to just 24%.

Mortgages MD Richard Rowntree says that with sustained strong tenant demand and the constrained supply seen in both the rental and home-buying markets, it’s no great surprise that void periods have reached a five-year low.

“This reinforces our belief that policy designed to support homeownership, which we support, should be carefully considered so as not to be at the detriment of a private rented sector that is evidently as important now as it’s ever been,” he adds.

“Put simply, we need more homes and achieving this will require an approach that sees all tenures viewed as solutions, with each catering to a diverse mix of people at different stages of their lives.”

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RENTS: Annual inflation hits 8.5% as tenants fight over fewer properties

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The average rent in the UK increased by 0.4% during January to £1,064 per tenancy, or £897 if London’s sky-high rents are omitted, the UK’s most comprehensive rental index has revealed.

HomeLet, which uses data from some 5,000 participating letting agents and a million references each year, says while UK rents are increasing by 8.5% a year, London’s are 12.6% higher year-on-year.

Also, eight of the UK’s 12 regions and countries (see table below) saw rent increases last month, although annual increases remain strong across all of them on a yearly basis with rises strongest in the NW, Scotland, Northern Ireland and the SW.

The figures starkly reveal the current problems facing the private rented sector – the government’s energetic effort to batter landlords on a number of tax and regulatory fronts are leading to less stock while many tenants are staying put as they put off buying their first home.

“As expected, 2022 has started as 2021 ended, with an imbalance between supply and demand, and inevitably that has brought on price rises, that will likely continue in the coming months,” says Andy Halstead, HomeLet & Let Alliance’s CEO (pictured, below).

“There are some caveats, though. Though we have seen another record high rental price this month, we must consider inflation rates, a topic that has been discussed heavily in the past couple of weeks.

“Based on the latest inflation figures, the month-on-month rent increases have been lower than the wider inflation rate, indicating a level of steady growth. 

“The private rental sector has played a key role in the UK throughout the pandemic, and we hope that the government will make things easier for landlords in 2022, to allow them to continue playing a key role in the coming months and years.” 

Figures in full

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LATEST: Homes now worth £24,500 more than a year ago, on average

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Price growth slowed to +0.3% in January – the lowest rise since last summer – although it was enough to push the average house price to a record high of £276,759.

The Halifax House Price Index reveals that the annual rate of growth remains steady at 9.7%, putting overall prices about £24,500 up on this time last year, and £37,500 higher than two years ago.

The lender also reports that transaction volumes are returning to more normal levels.

Wales was by far the strongest performing nation, with annual house price inflation of 13.9%, where the average house price fell slightly to £205,253. In England, the North West was again the strongest performing region, up 12% year-on-year, with an average house price of £213,200.

Although London remains the weakest performing area, annual house price inflation increased for a third straight month to 4.5% – its strongest performance in more than a year.

Deposit pressure

Halifax warns that the pressure on deposit requirements will become more acute in the short-term as household budgets face even greater pressure from an increase in the cost of living and rises in interest rates begin to feed through to mortgage rates.

Twindig CEO Anthony Codling agrees and says: “Deposits will be key to the level of house price inflation this year. Those with a big deposit will be able to rise above the living and mortgage cost rises, those without will not and unfortunately, the deposit poor will also find it harder to save as living costs rise.”

Property portal OnTheMarket.com CEO Jason Tebb adds that it’s not clear whether last week’s interest rate rise will impact buyer confidence, particularly given greater pressure on budgets from an increase in the cost of living.

He says: “With mortgage rates still comparatively cheap and many on fixed-rate products, positive sentiment should prevail for now although it’s possible that the growth in average prices may continue to slow over the next few months.” 

Tom Bill, head of UK residential research at Knight Frank, believes supply will pick up as more owners decide now is the time to act.

“A number of prospective sellers had hesitated due to the distortive effect of a stamp duty holiday and a global pandemic,” he says.

“This year could see high demand more evenly matched by supply, which would mean UK house price growth ends 2022 in single-digits.”

Read more house price news.

©1999 – Present | Parkmatic Publications Ltd. All rights reserved | LandlordZONE® – LATEST: Homes now worth £24,500 more than a year ago, on average | LandlordZONE.

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House Price inflation slows in January

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The latest Halifax House Price reported growth slowing in January to 0.3%, the lowest inflation figure since June last year, but average prices still hit a new record high of £276,759.

The annual rate of growth still remains high at 9.7% with transaction volumes returning towards pre-Covid levels.

View Full Article: House Price inflation slows in January

Being an expert after an expert is employed?

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You have an EICR done by a NAPIT registered professional – it raises a few C’3. The report actually states ‘ There are no items adversely affecting electrical safety, and the C’s listed are categorised and listed as ‘Improvement recommended’.

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MARKET: Belvoir predicts another year of rising rents

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At the end of last year, Belvoir’s Q3 rental index revealed the highest rental increases since records began in 2008. But what lies ahead for the market in 2022? Read on to find out more…

“Most of Belvoir’s offices operate outside the London area, and bearing this in mind, those Belvoir offices that have been trading since 2008 in England, Scotland and Wales were reporting average advertised monthly rents of £817 in Q3,” says Dorian Gonsalves, CEO of Belvoir.

“Compared to Q3 2020 this represents a large year on year increase of just under 9.5% and an 8% increase when compared to Q3 2019. Furthermore, the majority of Belvoir’s franchisees are predicting that rents are likely to stay the same or will continue to rise in 2022.

Belvoir’s figures are comparable with data from other sources, with the property portal website Zoopla recently reporting the strongest rental growth in 13 years. When you consider that rents do not typically rise or fall by more than +/-4%, these really are staggering figures.

“Belvoir’s offices are experiencing regional variations in rents; for example, our statistics revealed monthly rents ranging from £573 in the North East, £676 in the North West, £759 in the South West, through to £1,161 in the South East and £1,585 in London.

Tight supply

In the South East rents were quite stable in Q3 – even low compared to the previous year – however supply was extremely tight, especially in areas where people were moving from London, and this is placing enormous upward pressure on rents.

Our Belvoir Southampton office reported that the limited supply of flats in their area had forced rents up by 15%, and in some instances tenants have been offering to pay over the asking price in order to secure a property. Over in Tunbridge Wells tenant demand increased for all properties with people moving to the area from London.

As a consequence, rents for flats increased significantly across the board, with house rents increasing by as much as 25%.

Prediction

“Looking ahead to the rest of 2022 and beyond – Belvoir’s franchisees across the country are predicting that rental increases are likely to continue.

“A cross-section survey of franchisees across the Belvoir network reveals that tenant demand is extremely high, but half of our offices are currently experiencing a shortage in all types of properties, from one bed flats up to five-bedroom homes and there is little indication of any easing in the shortage of available properties.

“As the market continues to adjust following earlier lockdowns, tenant trends appear to have changed slightly, in that fewer are staying for less than a year, and the most popular length of stay remains 19-24 months.

“Belvoir’s data suggests that although slightly more landlords are not buying new properties to add to their portfolio, there was a slight increase in both those buying three or more and for those buying six or more or 11 or more.

Mass exodus?

“Despite everything that landlords have had to endure in recent years, there we have seen no evidence of a mass exodus from the sector. The English Housing Survey reveals that BTL grew significantly between 2002 -2016, more than doubling in size to 20%, falling slightly to 19% in 2016.

“The market has remained at this level ever since. This is a good indication that despite everything thrown at landlords they have not left the sector, but new landlords have been discouraged from introducing new properties to the market, which means there is inevitably less availability of properties for tenants.

“Belvoir is predicting that rental inflation will continue to increase at 8-10% for the rest of this year and are only likely to return to lower levels when more landlords feel confident about introducing further properties into the sector.

“We strongly recommend that landlords consider using the services of a reputable, professional property management agent to help them secure the best tenants for their property, to maximise the potential of their investments and to help ensure that they are keeping up to date with government policies.”

To review all of Belvoir’s rental indexes in full visit: https://www.belvoir.co.uk/rental-index/

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Comment: the self-defeating march of ever increasing landlord regulation

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Announcing his Levelling-up White Paper, Michael Gove unveiled the government’s plans “to transform the UK by spreading opportunity and prosperity to all parts of it.” The rhetoric sounds fine and dandy, but the reality for landlords is likely to be something quite different.

In addition to having to deal with a slew of additional regulations and restrictions, many private buy-to-let landlords are likely to have to put their hands deep into their pockets to substantially improve their rental properties. Older properties will need the most money

Older rental properties

Gove’s plans will force rental property owners with older properties – and the majority of rental properties tend to be older – to carry out improvements costing up to £15,000 each. There are estimated to be around 800,000 rental properties in England that fall into the category of needing up-grading.

The 400-page white paper proposes new minimum standards for private rentals, and new regulations which come on top top of existing rules, forcing landlords to make properties more energy efficient.

This, combined with the other landlord measures included in the White Paper, the tenant friendly letting restrictions, will undoubtedly drive some existing landlords out of the market. It will exacerbate an already severe shortage of suitable homes in the very regions the policy is focused on rejuvenating.

The National Residential Landlords Association (NRLA) certainly thinks so, it warns that the additional cost of these upgrades will force more private landlords to sell up, unless the Government comes up with some sort of support package.

Minimum health and safety standards

Mr Gove’s proposed changes will mean that all rental homes have to meet minimum health and safety and energy standards. But because areas in the North and Midlands, where levelling up is targetted, tend to have higher rates of poor quality homes, the measures will have a disproportionate effect on landlords in these regions.

Parts of Yorkshire and the Humber, the West Midlands and the North West are specifically mentioned in the white paper, but here property values are lower that other parts of the country, which means that landlords are unable to use mortgage debt to cover the high cost, as is the case in say, the South East.

Arguably, some of these proposed measures are sorely needed where a minority of neglectful landlords are concerned, and particularly those issues affecting health and safety, but others are taking the industry back to the dark old days of long-term security of tenure. The Rent Acts, which gave tenants lifetime security – and some of those legacy tenancies are still around today – are at the extreme end of this scale, but the trend now goes in that direction.

Section 21 to go…

The long anticipated abolition of Section 21, the ‘no fault’ eviction process which has provided a “safety net” for private landlords since the 1980s, is coming to an end, according to the paper. It will end the “unfair situation where renters can be kicked out of their homes for no reason,” the Paper says.

There will also be a consultation on introducing a landlords’ register, yet another measure that is supposed to crackdown on rogue landlords, the idea being that it makes sure that fines and landlord bans stop repeat offenders. However, it introduces further costs and a similar system operating in Scotland for some years now has met with questionable results.

Tightening regulations will make life tough for landlords

The current trend across the whole of the UK regions is to tighten landlord regulations, giving tenants ever more protection, but is this really helping?

Across the regions, starting with Scotland but spreading to Wales, Northern Ireland and now England there are seriously more stringent measures being introduced, all of which make the work of landlords more onerous and risky. They give tenants increased security of tenure, along with other protections.

When faced with delinquent tenants landlords want to be able to evict, and quickly. On the other hand, when landlords have good tenants who look after the property and pay their rent on time, most landlords would want them to stay as long as possible.

Compared for example to some American states – Virginia for example, with police sheriffs evicting tenants if they miss just a few weeks’ rent – evictions in the UK can never be described as quick or easy, averaging around 6 months, and this time period is now set to get extended even further.

A major deterrent for landlords

The assured shorthold tenancy – which remains in tact in England for now – was a major factor in the growth of the buy-to-let market, with around 4.4 million households now rented under the regime. It guarantees that landlords can regain possession, albeit with a few months’ wait, but it provided the necessary assurance that investors and mortgage lenders could at least get their property back, even if it meant a financial loss, usually before too much damage had occurred.

With these new proposals, the shorthold concept is under threat in England and is already gone in Scotland and Wales. It’s passing will be a major deterrent for landlords.

Most tenants are responsible

In my experience of dealing with working and professional tenancies, the majority of tenants, around 90% of them (19 out of 20), are excellent tenants. They respect the property and pay their rent on time. But if you get saddled with the 5% tenant, the one out of 20 who fails to pay, causes damage or generates constant complaints from neighbours, then it looks like you are in for a very rough ride in the future – there will be no quick, easy or inexpensive solution.

So, increasing security of tenure increases risk for those landlords. For those who operate a portfolio of properties, say 5 and upwards – and many now operate through limited companies – they can generally cope quite well with the odd rogue tenant. But what about the 45% or so of landlords with just one property, many relying on their rental income to pay a mortgage or fund retirement. For them a bad tenant becomes a financial nightmare, and it’s likely to get worse as these new laws come in.

House price growth is peaking

So far through the pandemic landlords have been bolstered by the growth in house prices. House prices growth has confounded all expectations though the Covid pandemic, and this has been a boost for buy-to-let investors with rents rising by 5% and house prices by 10%, keeping many landlords in the market. But as the virus recedes, we hope, and we face the massive debt that’s been accumulating, house price growth is likely to stall.

So, take more expensive mortgages, tighter regulations, draconian eviction restrictions throughout Covid causing serious rent arrears, a hostile tax regime and these new proposed measures and combined they could easily trigger a mass exodus of buy-to-let landlords in 2022. That’s what’s likely in store for the UK buy-to-let rental market in 2022.

There is only one result, in my view, of cracking down so heavily on the responsible majority of buy-to-let landlords who operate within the law and provide an excellent service – they will leave. If they leave, a rental shortage will keep rents high or push them even up higher – total rental stock levels are already some 43 per cent below their five-year average, that’s according to property portal Zoopla.

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