The growing importance of energy efficiency in home buying decisions

• With around 16% of the UK’s total emissions coming from residential housing, improving energy efficiency is crucial to reaching the country’s net-zero target by 2050.
• Our research explores the growing importance of Energy Performance Certificate (EPC) ratings of UK homes. Our proprietary analysis shows that homes with a higher EPC rating sell at a premium.
• Cost is the largest barrier to preventing improvements. Government programs like the Energy Company Obligation (ECO) have not been effective enough.

What is an EPC certificate? Energy Performance Certificates (EPC) are a measure of energy efficiency of UK residential buildings. We have developed a proprietary dataset to estimate the impact of energy efficiency on UK residential property prices. Novelly, we have linked together the price paid data from the Land Registry with the Energy Performance of Buildings Register from the UK Government. Using econometric analysis on a dataset containing 11 million registrations, we estimate the impact of an EPC rating on the UK residential property price.

Buyers are willing to pay more for homes with high EPC rating

Our analysis of house prices by EPC rating shows that willingness to pay increases with a higher EPC rating of a home. We find that consumers are willing to pay 3.4% more for a high energy-efficient home (A or B rated) compared with Band D, as shown in the Chart, highlighting that energy efficiency is now an important factor in home-buying decisions.

Households are willing to pay more for a home with a higher EPC Band on average

Our dataset also highlights the impact of owning a less energy-efficient home. Consumers expect meaningful discounts on properties with poor energy performance, with homes rated F or G typically selling for 7.4% less compared to D-rated properties. Even homes with a Band E rating see a notable decrease in value, with households willing to pay 3.4% less for Band D homes on average.

Our results suggest that households typically don’t differentiate much between average energy efficiency ratings, with a Band C rating commanding a more modest premium of 0.5% over Band D properties. This comes in contrast to homes with high energy efficiency (A or B ratings) that tend to command higher premiums, while those with very low efficiency (F or G ratings) often see reduced willingness to pay from homebuyers.

Cost is the largest barrier to preventing improvements

Upgrading insulation, installing double glazing, or putting in a new heating system is expensive. Many people are put off by the upfront costs, even if they know these improvements will save money in the long run. Indeed, the ONS reports that over one in three adults reported cost was the reason they were not considering energy improvements. Another challenge is the lack of skilled workers. Improving energy efficiency requires skilled labour, and there simply aren’t enough trained professionals to meet the demand. This skills gap is slowing down progress and needs to be addressed if the UK is to meet its efficiency targets.

Government programs like the Energy Company Obligation (ECO) have not been effective enough. The most substantial improvements in the efficiency of the UK housing stock occurred last decade, with the share of A to C-rated dwellings only increasing by two percentage points more recently in the two years to 2022.

The new Labour administration has targets in place, but ambition requires more action. However, the Government is already grappling with an additional circa £22 billion in unexpected spending for 2024-25. A recent audit of spending plans suggests the need for fiscal consolidation in the upcoming Autumn Budget making it unlikely that the Chancellor will allocate new funds for energy efficiency. As a result, achieving near-term energy efficiency targets seems doubtful without further government support.

Market forces have a role to play. As we have shown with our proprietary analysis, people are willing to pay more for energy efficiency. Further proof of the increasing desire to mitigate climate risk are so-called green mortgages. Green mortgages offer benefits such as lower interest rates, cashback incentives, and higher borrowing limits for homes in the top EPC Bands. These specialised products have become more popular in recent years now offered by major lenders.

With around 16% of the UK’s total emissions coming from residential housing, improving energy efficiency is crucial to reaching the country’s net-zero target by 2050. In the near term, the new Labour administration faces fiscal constraints and must set out a realistic pathway to achieve its climate goals. Clear communication is essential, both in setting targets and raising awareness of the importance of energy efficiency. While progress has been made, the UK still has a long way to go to achieve the necessary reductions in energy use.