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Safe as houses? Climate change and its impact on UK property

By Graeme Gillespie - Posted on 21 October 2021

COP26 has put climate change centre stage. Here in the latest of our COP26-related blog series, alumnus Graeme Gillespie looks at how climate change can impact homeowners in many ways and how it can affect residential properties. 

Climate change risk to property manifests itself in two ways: 

● Physical risk associated with an increase in river, coastal and weather related flooding, along with increasing ground risks such as subsidence, coastal erosion and mine collapse. 

● Transition risk associated with new regulations and consumer preferences as the UK moves to a lower carbon economy. 

I work at Hometrack, part of Zoopla Property Group, which provides automated property valuations to 17 of the top 20 UK lenders. In January, we launched a new Climate Change Risk solution that provides mortgage lenders, housing associations and local councils with a statistically robust assessment of their residential property portfolios. 

It has been widely adopted within the industry; lenders with around 25% market share of all UK mortgaged properties are already using it, and this has provided us with insight into the reality of climate change risk to residential property in the UK. 

Physical Risk: How does climate change impact residential property? 

Our consistent findings are that around 85% of residential properties have negligible current or future risk from physical risks, with roughly 5% of properties in the highest current risk category. However, we see a consistent increase in risk across almost all portfolios that we have assessed; an additional 1% moving to high risk by 2050, and another 1% by 2080. 

Sounds like a small change? Well, each 1% represents £15 billion of mortgage lending, and perhaps more worryingly 300,000 properties that are homes to real families. 

Within this highest risk category, flood risk is such that many insurers would currently consider ceding the policy to Flood Re (a joint initiative between the Government and insurers that allows insurers to offset excess flood risk for a set fee). However Flood Re is mandated to exist only until 2039, after which there is the very real possibility that the highest risk properties will become difficult to insure. 

As property insurance is a condition of most mortgages, up to 1.5 million highest risk properties could also become difficult to mortgage, limiting their future sale to cash-only buyers willing to accept an uninsurable flood risk. 

Transition Risk: How does residential property impact climate change? 

If physical risk impacts people’s homes, transition risk is slightly more complicated. The transition to become more carbon neutral does not simply impact the value of a property, but homes also contribute to the climate change problem. 

According to the UK Climate Change Committee (CCC), heating and lighting generates an average of 4 tonnes of CO2 per UK residence, which the CCC states must be cut by 45% by 2030 in order to hit internationally agreed targets. 

Our analysis of major property portfolios indicates that only 39% of residences enjoy an Energy Performance Certificate (EPC) rating of C or better, with a whopping 41% of all properties in band D. The good news is that most properties have a much higher potential rating, and a programme of improvements could result in 88% of properties achieving a rating of A to C. 

Our analysis shows very little current correlation between property value and EPC rating. New build properties do sell at a premium and they do tend to have a higher EPC rating, but it is the newness that generates both outcomes. It is not the EPC efficiency that drives the price premium. Aside from newly built homes, UK homeowners continue to value charming property features and location over energy efficiency. And with new builds accounting for only 1% of total housing stock per year, clearly any improvement to energy efficiency has to include retro-improvements to existing properties. 

Part of the challenge is that heating and lighting remains relatively inexpensive as a component of home ownership. The average UK mortgage of £150,000 might typically generate a monthly payment of around £900 while the average monthly combined energy bill is around £90. Energy costs, despite recent rises, are simply too small a component of total property cost to materially alter consumer behaviour. 

Energy efficiency upgrades to move existing properties into EPC Band A-C, cost an average of between £5,000-£10,000, while generating an average saving of just £200 - £300 per annum. While governments might fund a 20+ year programme of energy efficiency, most individual homeowners will not. 

Unless policies are introduced to alter the cost benefit balance, individual homeowners will continue to purchase energy inefficient properties and do little to improve their EPC. 

However, if energy costs continue to rise and government and/or lenders can facilitate longer term energy efficiency improvements, it is reasonable to predict that properties with lower running costs could sell at a premium, which could encourage owners of inefficient properties to invest to maximise sale price. 

In the meantime, homeowners who wish to reduce their own carbon footprint could start with relatively easy steps of installing energy efficient lighting such as LED and improving insulation in easy-access loft space.  Requesting a smart meter is also a great way to ensure energy consumption is very visible to all the family.

Longer term, gas and oil will be banned from new homes by 2025 and while there are no firm plans to phase out gas boilers in existing homes, it may make sense not to simply replace like-for-like when an existing boiler breaks down.  Incentives are available to replace these with a renewable heating system, like a biomass boiler or air to water heat pump. 

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