Chapter 3 : Financial Market Transformation
The outcome we want to see:
There is a market premium on warm, high quality, low carbon homes with lower running costs because these attributes are valued by lenders, consumers and surveyors.
Why is this important?
3.1 Low carbon, energy efficient homes, including those with micro-generation technology, do not currently attract favourable lending terms or higher property values. In contrast, place-making is valued in the housing market. For example, a home in a well connected neighbourhood will be valued higher than a home with identical energy efficiency and technology but relatively isolated from amenities. Yet energy efficient homes are warmer and cheaper to run than other homes because of lower energy bills, and may even attract tariff income from Government schemes, but this does not affect their value.
3.2 This is due to two inter-linked factors -the current systems, practices and regulatory frameworks for valuing properties and advancing loan finance, and the knock-on effects these have on the priority consumers place on having a sustainable, energy-efficient home. Each of these factors influences the other so, without change of some kind, they could be self-perpetuating.
3.3 Similar issues affect other aspects of sustainability such as housing quality and maintenance. Surveyors will take account of the condition of a property when valuing it, and potential buyers now have more information upfront about the condition of a house through the Home Report. However, there are still problems of disrepair in private sector housing. Although home owners are spending more than £2 billion each year on their homes the underlying level of disrepair is not improving. There needs to be a greater emphasis on structural work and routine maintenance as opposed to more cosmetic improvements. Action proposed to address this cultural shift is outlined in Annex B .
3.4 Public funding will continue to be important to support the cost of energy efficiency measures for those on low incomes and others may be motivated to buy or retrofit greener housing because they want to do their bit for the environment. However, many households are more likely to invest in energy efficient housing if there is a clear financial benefit to them. This could be in terms of lower energy bills, higher property re-sale values or tariff income. Less tangible aspects of value such as status and conforming to social norms may also have a part to play.
3.5 Ensuring that the market fully reflects the benefits of greener housing is therefore vital in encouraging households to take-up the measures needed to achieve our emission reduction and fuel poverty goals. This is particularly important in the context of the new market-led incentive based approaches, such as the Green Deal (see chapter 1), which are expected to become an important part of the energy efficiency landscape.
The Greener Homes Summit
3.6 The importance of these issues came into focus at the Greener Homes Summit chaired by the Cabinet Secretary for Infrastructure and Capital Investment, involving developers, finance and technology experts, in November 2011. This event examined how Scotland could exploit opportunities for investment in sustainable housing.
3.7 It was recognised that there are fundamental issues about the acceptance of, standards for, and education about green home products by lenders, developers and consumers. While green mortgage products have a niche position in the market (see box 7), mortgage providers are not currently focussed on developing them for the mass market. One of the main reasons for this is that they do not believe consumer demand for these products is high enough to make them attractive for lenders.
3.8 As valuations are one of the key drivers for the lending sector, it was agreed that there was a need to review the valuation process. This could help to create more demand in the market and acceptance from the lenders.
The Ecology Building Society offers a range of mortgage products and lends throughout the UK. It specialises in renovation and new build mortgages on properties and projects that respect the environment. Where possible, mortgage pricing is aligned with the project's positive environmental impacts, in particular energy and carbon reduction, through its series of C-Change mortgage discounts. The society is particularly interested to see derelict and dilapidated property brought back into use. The Society also actively supports the widespread application of Passivhaus building principles in the UK.
Our specific objectives for financial market transformation
3.9 We need to transform attitudes to the benefits of sustainable homes. In 20 years time it is reasonable to expect that most individuals will own or rent a home that meets agreed legislative standards of sustainability. It may also be socially unacceptable for home owners or landlords to not meet these standards. In the same way that it has become normal to wear a car seat belt and recycle household waste, it will become the norm to live in a well insulated home with low energy use.
3.10 Such a transformation will need to be an incremental process that starts with changing perceptions and behaviour. This would be assisted by:
- Lenders recognising the value of a property's energy rating through preferential mortgage products or 'green' mortgages.
- Further development and implementation of guidance on taking account of sustainability in valuation practice (see section 3.13).
- Professionals who understand the benefits of sustainability and micro-generation and can influence the general public.
- The availability of a well-understood calculator to measure income from micro-generation (for example, PV Solar and heat pumps) which is used and recognised in the property valuation process.
- Sustainability being seen as a desirable attribute that is recognised and valued by the public.
- Smart meters and better controls on heating and lighting make it easier for consumers to understand and reduce their heating costs.
- Financial incentives being available to improve the energy efficiency of houses.
- Publicity for success stories which helps to enhance the reputation of greener homes, including successful adaptation of traditional buildings.
Minergie Standards is a sustainability labelling system for new and refurbished buildings, systems, components and materials which is used in several European countries. Developed in Switzerland in the 1990s by the Minergie Association, the system has since expanded through franchising to France, Italy, Germany, the USA and the United Arab Emirates.
The Minergie standard has been well marketed and has broad political, business, trade and professional support in Switzerland. Plaques are mounted on buildings which have been certified to indicate the standards. Minergie labelling has a positive influence on the market, with certified buildings being easier to rent, have higher levels of user satisfaction and lower tenancy turnover, which in turn leads to higher income for investors. There are a number of different standards available under the Minergie badge, with increasingly rigorous ecological requirements. Minergie is also able to provide mortgages which have interest rates 0.75% below market rates.
Legislative and policy levers for action
3.11 When a property is marketed for sale both sellers and buyers have access to an Energy Report (including an Energy Performance Certificate) as part of the Home Report, which provides information on the energy efficiency of the property and how this could be improved. The Property Questionnaire, also part of the Home Report, contains information such as council tax banding and heating systems. From January 2013, all adverts for properties marketed for sale or rent must display the EPC rating. This will raise the profile of a property's energy efficiency and make it more obvious to consumers.
3.12 Chapter 2 on Standards refers to consideration of the potential future role of EPCs in affecting behaviour to improve energy efficiency, and there may be scope to consider whether the Energy Report and property questionnaire could also be amended to further improve awareness and action. It also considers the potential role of other measures such as council tax and the replacement for stamp duty land tax. In the longer term the adoption of minimum standards for existing homes could help the market to recognise the value of energy efficiency.
3.13 But information through EPCs and providing other incentives on their own may not be enough to bring about change unless the energy efficiency and low carbon qualities of homes are recognised and reflected in professional valuations. While this will take time, the Royal Institution of Chartered Surveyors ( RICS) has already made a start by publishing new guidance on valuing sustainability in homes  .
Q34: (a) In sections 3.11 - 3.13 we describe the range of legislative and policy levers that we believe are available to help us transform the financial market such that it values warm, high quality, low carbon homes. Do you agree that this is the full range of levers? Answer Yes/No
(b) Can you suggest ways to help transform the market for more energy efficient, sustainable homes?
Main challenges to address
3.14 This chapter has set out how the market does not currently attach any additional value to homes with new technologies or higher standards of energy efficiency. The view of valuation professionals is that the market is not ready to pay a premium for sustainability. We recognise that change will take time and is currently affected by the economy and the cycle of the housing market, but we believe this is the time to start to address these issues.
Q35: What changes would be required to current survey and lending practice to enable mortgage lenders to take account of the income from new technology or savings on energy bills?
- 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 will be received and how it may affect property values.
- lack of information or proven examples of how a clear incentive structure could support behaviour change.
- lack of familiarity about new technology such as heat pumps and Solar PV.
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?
Action to address these challenges
3.16 We will consider the best way to work with key partners including the Council of Mortgage Lenders and RICS to encourage change in perceptions and practice among their members and examine the potential for expansion of the range of 'green mortgages' and other relevant financial products on offer.
3.17 For the new-build market, reviews of the energy standards in building regulations and the new system of sustainability labelling described in chapter 2 will help to raise expectations of what should be considered 'normal'
3.18 We will work with others to provide better information, evidence and case studies of the benefits of low carbon housing for example through academic research, Historic Scotland and the Green Homes Network.
The Green Homes Network, funded by the Scottish Government and managed by the Energy Saving Trust, provides the opportunity for people to visit green homes in their area. This means they can find out at first-hand how different renewable systems technologies actual operate; hear about actual costs and savings; and get tips and advice that could help them to improve the energy efficiency of their own home. The network currently has over 570 homeowners - and the number is growing. In a very practical way, this network is helping to take the mystery out of greener homes and demonstrate their value.
3.19 The Scottish Federation of Housing Associations, supported by pilot funding from Scottish Government, has led on the development of the ground-breaking carbon portal project which uses thermal imaging as a highly visual way of identifying the need for, and potential benefits of, insulation measures  .
3.20 The Scottish Government has also been examining how to encourage sustainable behaviours, including in housing, through its 'Climate Change Behaviours Research Programme'  . One key finding is that trying to change behaviour simply by targeting individual householders can only have limited success. A broader and more ambitious focus is often needed, and this is particularly true for this strategy with its vision of a major cultural shift in how we think about and live in sustainable homes. The research programme suggests that there are three key 'levels' of intervention and that, if these are effectively joined up, significant change can happen. These levels are as follows:
- The individual level, making it easy for households to live more sustainably, for example by providing tailored advice and personalised feedback, giving incentives where appropriate, and offering intensive support from start to finish when any energy efficiency measure is being installed.
- The social level focuses on establishing new social norms, values and expectations. In other words, the sustainable option needs to become the most obvious and natural choice for everyone, and the importance of sustainability as an idea needs to be widely understood. Action at community level, including area-based schemes, and community engagement and ownership models can be effective.
- The material level, which means providing the 'hard' infrastructure of new products, such as better insulation, but also, at a larger-scale, building demonstration homes which show what sustainable housing looks like and how it operates. New technology is also important, improving what we already have ( e.g. more efficient boilers) but also providing new services, such as the ability to control domestic heating and lighting systems from outside the home via a computer or smart phone. The 'soft infrastructure' of new standards and regulation, or the provision of smarter services with informed and expert professions, also plays a key role, and these need to be consistent and reliable.
3.21 Research into behaviour change has influenced the development of the Scottish Government's new overarching climate change public information campaign. ' Greener Together' encourages us to see that all our actions combined can make a big difference, with a strong call to action for us all to work together for a cleaner, greener Scotland. The campaign aims to develop a wider understanding of climate change and to bring the key behaviour areas together, providing the public with information on how they can get involved, encouraging them to do more, more often.
3.22 The supporting website www.greenerscotland.org - a one-stop shop for greener living - combines a wide range of information and resources to help everyone go greener together, with advice on how to save energy, reduce waste, travel smarter and eat greener. The website offers a variety of practical tips and useful tools such as the Greener Plan, the what's-in-season web app, the well-insulated virtual house and a find-your-nearest-recycling facility.
The BRE Innovation Park @ Ravenscraig follows a 'ground-up' approach to sustainable planning and development. The site features porous road surfaces and paving, a 3-stage Sustainable Urban Drainage System, native planting and landscaping, street furniture and lighting and a natural play area. Nine demonstration buildings will be constructed which will showcase products and technologies which meet the future energy requirements for Scotland. A visitor centre will also be provided which will also operate as a community facility, engaging with local groups such as school children, young adults and FE colleges. The visitors centre will also be a high-performance demonstration building in its own right. The development plots on the Park have been individually themed to promote the demonstration of innovative construction methods which can be utilised to provide a zero carbon performance.
Q37: (a) Section 3.16- 3.22 sets 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? Y/N
(b) What further action is needed to influence consumers and the market?