Can policy nudge investors into retrofitting?
The Week in Housing 27/01/23
This week I’m delighted to bring you another guest post, this time by Joseph Kilroy who is Head of Policy & Public Affairs - Ireland, Scotland & Wales at the Chartered Institute of Building. Joseph discusses here some of the ideas and research presented in the CIOB’s recently published report on ‘green flipping’. Huge thanks to Joseph for this fascinating piece.
With climate legislation now in place in Ireland, attention has turned to sectoral emissions limiting policies. The housing sector accounts for a significant proportion of national emissions, and it seems policymakers are perpetually attempting to embed retrofit into Ireland’s housing stock. While uptake is increasing, the discrepancy between targets and actual rates of retrofit suggests that additional measures to incentivise consumer demand are needed. We recently made a proposal to encourage retrofit through the tax system by deferring stamp duty liability on properties that have been purchased for refurbishment and resale.
The proposal is to defer stamp duty liability on properties that have been purchased – by individuals, groups, or businesses – for the purpose of improvement. Once the enhanced property, which must have its energy efficiency improved as part of the refurbishment works, is resold, the stamp duty liability is paid. The crux of the proposal is to encourage investors to improve the BER (Building Energy Rating) of older, less energy efficient stock for resale, thereby creating a ‘green flipping’ business model, and a new stream of retrofitting.
The built environment sector accounts for 37% of Ireland’s carbon emissions. Heating, cooling, and lighting buildings – operational carbon - account for 23%, with the remaining 14% attributable to embodied carbon. Embodied carbon emissions result from mining, quarrying, transporting, and manufacturing building materials, in addition to construction activities, the repair, renovation and final disposal of buildings. Although embodied carbon emissions in the built environment sector are rising and – as we have argued - require a firm policy response, residential operational carbon is proportionally the sector’s highest emitter. It accounts for 43% of built environment emissions, and 16% of national emissions, with the increasing number of home-based workers likely to inflate these figures. Getting a handle on residential operational emissions is therefore a policy priority.
Ireland’s housing stock
A total of 2,124,590 permanent dwellings were counted in Ireland during Census 2022. This is an increase of over 120,000 units (6%) between 2016 and 2022. The number of occupied households increased by over 150,000 (9%) to 1.86 million while the number of vacant dwellings fell by over 16,500 (-9%) to 166,752.
In terms of operational emissions:
• less than 25% of the housing stock is A or B rated;
• 71% of buildings’ energy demand is from fossil fuels and 29% from electricity.
Despite advancements in the new build sector in recent years, Ireland’s per dwelling energy use remains 7% higher than the EU average, driven largely by existing stock. In 2019, 80% of Irish homes and other buildings had a BER rating of C or lower. While the peripheral location of new housing developments remains an issue from a sustainability perspective, new build homes in Ireland produce relatively low emissions. This is thanks to recently updated building regulations, which typically require new homes to have a Building Energy Rating (BER) of A2, which makes them Nearly Zero Energy Buildings (NZEB). NZEB homes are 70% more energy efficient and emit 70% less carbon dioxide than those built under 2005 Building Regulations standards. However, the bulk of Ireland’s housing stock was built before the introduction of the current regulatory regime and is extremely energy inefficient.
Retrofit to date
Progress has been made, and by 2020, over 440,000 householders had availed of government supports through the Sustainable Energy Authority of Ireland (SEAI) to make their homes more energy efficient and to use renewable energy. In 2021, 15,457 homes were upgraded to BER B2 level. The Climate Action Plan envisages this scaling up to over 50,000 annually from 2024, to achieve a target of retrofitting 500,000 buildings to a B rating or above by 2030.
This target of retrofitting 500,000 by 2030 is appropriately ambitious, and has been accompanied by annual increases in climate allocated expenditure. While targets and finance are crucial, international evidence suggests that simply granting money for retrofitting without grappling with consumer sentiment does not deliver significant results. If investment is to have a meaningful impact, policy should be informed both by the heterogeneity of household preferences, and by the composition of the housing market. Ireland’s climate action plan focuses on individual households, which are a crucial part of the puzzle. However, this belies the composition of Ireland’s housing market, which comprises a significant proportion of non-households. Given the scale of the challenge – the need to at least triple current retrofit uptake - new business models and incentives, apart from grants to households, are required.
The tax system and the built environment
There is a precedent for making alterations to stamp duty in particular to achieve national policy goals. A stamp duty holiday was introduced in the UK in mid-2020 to incentivise transactions in the property market after the slowdown in activity arising from pandemic lockdown measures. In Ireland, refunds of stamp duty paid on non-residential property which is later developed for residential purposes are available under the Residential Development Stamp Duty Refund Scheme. This is to meet the wider national policy goal of increasing the supply of housing. Given that the tax system – and stamp duty in particular – is frequently used as a lever to achieve wider policy goals, could it now be used to create an additional source of retrofitting?
Cost and leverage
The proposal would be cheap. As a proportion of the overall tax take, residential stamp duty is relatively small in Ireland. Coupled with the additional market activity removing stamp duty brings about, deferring it for investors looking to retrofit a property, as per the proposal, would not come at a proportionally high revenue cost to government.
How efficiently would the proposal leverage private investment? Unsurprisingly, higher degrees of leverage correlate with loans compared to non-repayment financial assistance such as grants and tax-incentives. Nevertheless, policies requiring higher private payments understandably tend to be less attractive to households, can lead to less uptake, and reduce the overall number of retrofits. The proposal is a tax incentive aimed at embedding a ‘green flipping’ business model in the second-hand housing market and requires a large capital outlay to buy the property in the first instance. Therefore, it is likely to appeal to the cash-rich, investor segment of the housing market, rather than to households.
There is substantial, well publicised interest from institutional investors in Ireland’s housing market. Combined with the policy of local authorities and Affordable Housing Bodies (AHBs) to purchase housing on the open market, this means that the cash-rich, non-household buyer segment of the market is substantial. Therefore, the composition of Ireland’s housing market could lead to significant leverage for the proposal.
Additionality
If the proposal were to be embedded in the business model of local authorities, AHBS, and investors, as other tax arrangements and housing policies have been, it could lead to a significant amount of additional residential retrofits. Non-household entities (public and private) accounted for 21%, or 9,666 of second-hand or ‘existing’ housing transactions in 2021. On the assumption that most second-hand homes would benefit from an energy efficiency upgrade, and that investors and public bodies would take advantage of the proposal, this could lead to a substantial proportion of the housing stock being retrofit on an annual basis.
While these are arguably optimistic assumptions, even in a pessimistic scenario in which less than half of non-household transactions are incentivised by the proposal to retrofit, and non-household to household transactions are not considered (2,920), the potential additionality is 7% of all transactions resulting in a retrofit. Coupled with Ireland’s existing regulatory regime which typically requires new build housing to have a Building Energy Rating (BER) of A2, over time this policy could contribute to a churn of energy efficiency among existing properties.
CSO, Residential Property Price index
Housing market impact
Given the existing disequilibrium in Ireland’s housing market, would the proposal have unintended consequences? If successful, the proposal would result in additional demand for existing housing. It would be remiss not to mention the impact that additional demand could have on the housing market, given that Ireland is amid a two-pronged housing crisis: an affordability crisis, and an availability crisis.
The tax treatment of land and housing in Ireland is currently light by international standards, and this has led to significant interest in housing as an investment asset. Ireland relies almost exclusively on private development for housing supply, with publicly led housing delivery having retrenched over the last 30 years. Additional demand would put further pressure on an already stretched sector and may ultimately lead to increased prices. However, if the proposal were introduced alongside wider housing policy reform, specifically a resuscitation of direct public delivery, rather than exacerbating unaffordability, investor involvement in the housing could be leveraged to achieve sustainability goals, while supplying the market with more energy efficient housing.
The proposal is not a silver bullet. Its focus on a particular segment of the market, and its limitation to transacted properties mean that it would need to exist within a suite of measures if operational residential emissions are to be brought under control. Nevertheless, evidence suggests that the market reacts to changes to stamp duty. Therefore, as a measure that creates a new ‘green flipping’ business model, the proposal could potentially underpin a much-needed new source of residential retrofit.
Joseph Kilroy, Head of Policy & Public Affairs - Ireland, Scotland & Wales, CIOB
Events
In case you missed it, a recording of the latest Simon Talks webinar, featuring the ESRI’s Conor O’Toole looking at housing and the economy, you can now watch it here. UCD’s Centre for Irish Towns is hosting a seminar, featuring Michelle Norris among others, looking at housing and Irish towns on February 2nd. Last but not least, on the 8th of February the Housing Agency will launch their new residential satisfaction report.
What I’m reading
There’s been a spate of really interesting publications over the last few weeks. First up, the ESRI have a new paper entitled Increasing future housing supply: what are the implications for the Irish economy? Given a lot of the concern seems to have moved from the shortcomings of Government policy to bottlenecks and capacity issues that relate to the intersection of construction, inflation and labour markets, this report will be of great interest to many. The Joseph Rowntree Foundation have two new publications which are also very relevant here in Ireland. The first is something really innovative and different, especially relevant for those involved in campaigning, advocacy or communications, and looks at how we ‘tell stories about home’. The second looks at the role of housing allowances in affordability over the long term. AHURI have a new paper on the Australian PRS which looks at the impact of reforms, such as rent controls, on investment levels. In terms of new data, Eurostat have published new data on rents and house prices. Finally, Cormac Lucey wrote an interesting blog post on mortgage interest rates and ECB monetary policy - likely to be one of the biggest issues in housing over the next 12 months.