Increasing Energy Costs: The Impact on Buy-to-LetJames Trafford
Many tenants and homeowners are having a difficult time at the moment for a number of reasons. Low wage growth, rising rents, and soaring home prices in the market are adding to the pressures on tenants and first-time buyers who are trying to obtain a foothold on the property ladder. Increasing energy costs are only going to put a further strain on household budgets, and the conflict in Ukraine has geopolitical ramifications that will increase energy costs even more in the year ahead.
According to a report by the Trade Union Congress (TUC), energy prices are expected to climb at least 14 times faster than earnings in the United Kingdom this year alone.
In addition, the energy price cap rose from 1 April, which means that bills would jump £693 from £1,277 to £1,971 – a 54% increase, with a further increase set for October. With the possibility of a 40-year high in UK inflation this year, consumers, particularly those with lower incomes, may face an even worse situation in terms of rising prices.
There is a serious fear about fuel poverty and the ability to heat one’s home effectively in the middle of a hard winter in the year ahead. An increase in energy prices is expected to put an additional 6.5 million homes in fuel poverty, according to the National Energy Agency (NEA) fuel poverty charity.
End Fuel Poverty Coalition (EFPC) warns that conflict in Ukraine may push wholesale costs up to £3,000 per year, increasing the number of households in fuel poverty to 8.5 million — one-third of the UK’s total population. That’s a staggering statistic.
Rising costs in privately leased housing
Of course, on top of the everyday cost of living issue, many consumers confront considerable further financial difficulties. According to Homelet, UK average rentals rose 8.6% year-on-year in February, and Zoopla’s UK Home Price Index for January shows house prices rose 7.8% year-on-year.
Because of this, tenants are having a hard time making ends meet while simultaneously dealing with rising energy costs. First-time buyers, who are also having a hard time finding homes within their price range, are particularly hard hit by this double whammy.
Despite the fact that many individuals are content to rent for the foreseeable future, the current imbalance will only serve to increase demand for rental housing, which already confronts a lack of availability. If the cost of living keeps going up, it will only make the problems in the housing market worse.
With new EPC regulations proposed that would require all rental properties to meet a mandatory energy performance certificate rating of ‘C’ on new tenancies by December 2025 and by 2028 for existing tenants, as part of the government’s push to achieve net zero emissions by 2050, landlords will also face challenges.
Recent research from a financial institution found that landlords had spent an average of £8,900 upgrading their buildings – over 50% more than they anticipated they would be required to spend.
There’s a long way to go before we can say we’ve made progress here. Only about 40% of English houses reach the necessary EPC grade of ‘C’, according to new study, and many of these subpar dwellings are likely to be rented. According to a Shawbrook report, landlords are already finding it difficult to upgrade their buy-to-let properties to meet the new minimum energy efficiency standards, with 31 percent saying they only have enough money, 14 percent saying they don’t have the funds, and 6 percent saying they aren’t sure.
19 percent of landlords are using credit cards or short-term financing solutions to pay for renovations, while 60 percent of landlords are using their own funds or assets to pay for renovations.
Real estate’s costs and advantages
According to Shawbrook’s study, more than half of landlords plan to pass on at least some of the expense of upgrading their homes to satisfy EPC regulations, and this number climbs to 68% of landlords in London, where prices are higher.
In the long run, tenants will benefit from lower utility bills because of the lower overall cost of energy efficient houses, while purchasers will be more interested in properties with a higher EPC rating because of the lower overall cost of energy efficient homes.
For real estate agents, this could mean that emphasising a property’s EPC rating could become a better way to attract tenants in the future. Right now, consumers might not think EPC ratings are very important, but younger generations are becoming more cost-conscious (and environmentally conscious).
“There is a silver lining here,” noted Jamie Johnson, CEO of FJP Investment. “New-build and off plan buy-to-let properties will likely become more appealing as they already have better EPC ratings, which might cause landlords to adjust their portfolios to protect themselves against future expenses,” continued Mr. Johnson. Indeed, a landlord study found that 84 percent of landlords who are aware of green mortgages are enticed by the lure of lower interest rates.