A new study by Nationwide suggests that landlords selling properties with poor Energy Performance Certificate (EPC) ratings are unlikely to experience significant price reductions. Despite concerns over the impact of low EPC ratings on property values, the research indicates that the difference in selling prices may not be as large as initially feared.
The renewed focus on EPC ratings is driven by the government’s push for higher energy efficiency in rental properties. The target of achieving a minimum EPC C-rating for all rental properties by 2030 has been reintroduced. Initially introduced by the Conservative government and later abandoned, this requirement has now been reinstated under the Labour administration led by Keir Starmer. This move is part of a broader effort to meet the UK’s Net Zero goals, which are set for 2050.
As a result, many landlords are re-evaluating their portfolios, with some choosing to sell properties that may require costly upgrades to meet the new standards. However, the study’s findings provide some reassurance that selling a property with a lower EPC rating may not automatically lead to a substantial loss in value, allowing landlords to make more informed decisions moving forward.
Nationwide has highlighted the urgent need to decarbonise and upgrade the UK’s housing stock to meet the nation’s 2050 emissions targets. With residential buildings accounting for 15% of the UK’s greenhouse gas emissions, improving energy efficiency across the housing sector has become a critical focus in the broader effort to tackle climate change.
Recognising this, Nationwide conducted a detailed study to understand how energy efficiency ratings affect property values. By incorporating energy performance certificate (EPC) ratings into their house price index, they aimed to assess whether homeowners are paying a premium for energy-efficient homes or facing a discount for properties with lower ratings.
The study carefully controlled for various factors that typically influence property prices. These included the size of the home, the number of bedrooms, location, and whether the property was newly built. By accounting for these elements, Nationwide aimed to isolate the impact of energy efficiency on house prices and provide a clearer picture of how the market is responding to the growing focus on sustainability.
This analysis comes at a crucial time, as the UK government reintroduces its EPC C-rating target for rental properties by 2030 under the new administration. With additional Net Zero targets set for 2050, both homeowners and landlords are increasingly considering the role of energy efficiency in property decisions, not only for environmental reasons but also to stay aligned with evolving regulations and market trends.
Nationwide’s recent analysis highlights that energy efficiency plays a role in property values, though the impact remains relatively modest. Homes with top-tier energy efficiency ratings, such as A or B, command a 2.8% premium compared to similar properties rated D, which is the most common energy rating. This slight increase indicates that buyers are starting to place more value on homes with better energy performance, but the difference is not yet substantial.
Interestingly, the study found minimal price differences for homes rated C or E when compared to D-rated properties, showing that the market does not yet strongly distinguish between average energy ratings. However, properties with the lowest energy efficiency ratings, F or G, face more significant consequences. These homes are valued 4.2% lower than similar D-rated properties, reflecting the growing recognition of energy inefficiency as a downside for potential buyers.
Nationwide’s analysts point out that while the influence of energy efficiency on home values remains limited, there has been an increase in these effects compared to pre-pandemic levels. The premium for A or B-rated properties has grown since 2019, and the discount for F or G-rated homes has become more pronounced. This suggests that as environmental awareness continues to rise, the property market is gradually reflecting these concerns in home valuations.
The value placed on energy efficiency is expected to change over time, particularly if the government introduces incentives to improve energy efficiency and support the UK’s climate change goals.
Nationwide’s chief economist, Robert Gardner, notes that energy efficiency has significantly improved over the past decade, largely due to better ratings for newly built homes. However, the pace of improvement has slowed in recent years. According to the latest data from 2022, nearly half (48%) of the UK’s housing stock now holds a rating of C or higher, compared to just 18% in 2012.
Gardner highlights that newly built homes generally achieve high energy efficiency ratings, with 97% rated C or above. However, the growth of new housing stock remains slow, increasing by around 1% each year. It’s also important to consider that while new homes are more energy efficient once built, a significant portion of their carbon footprint, between 25% and 50%, is generated during construction.
Government analysis from the latest English Housing Survey indicates that if all applicable energy improvements were implemented in homes rated below a C, 96% of those properties would move up to bands A to C. However, 4% of homes would not improve beyond a D rating, even with upgrades.
The average cost to raise a dwelling to a band C rating is approximately £7,400. The total estimated cost to upgrade the entire housing stock is between £91 billion and £94 billion. Homes rated E to G generally require more expensive improvements than D-rated homes, with an average cost of £13,500 compared to £6,200 for D-rated properties.
The Government aims to upgrade as many homes as possible, across both owner-occupied and rental sectors, to at least a band C rating by 2035. However, the pace of these energy efficiency improvements is currently slow, especially given the size of the task. For instance, the number of insulation installations is significantly lower than in 2012, which was the peak year of the Carbon Emissions Reduction Target and Community Energy Savings Programme.
This points to the need for additional incentives to help decarbonise the UK’s housing stock.
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