The landlords walking into the great EPC trap

    26 May 2018

    Buy-to-let investors have long occupied a slot in the national consciousness somewhere between arsonists and child molesters. They stand accused of stealing millennials’ chances of owning a home and of enriching themselves on the back of tax breaks.

    Even George Osborne, who was happy to treat homeowners to an extra inheritance tax allowance, eventually grew fed up with them. Over the past few years, buy-to-letters have seen their right to count their mortgage repayments against tax withdrawn, and they’ve been forced to cough up an extra 3 per cent in stamp duty when buying an investment property. They have even been swept into the ‘hostile environment’ over illegal immigrants, threatened with huge fines if they let a property to someone with no right to live in Britain.

    And from last month, they have faced new restrictions, of which many landlords may be unaware. From 1 April it has been illegal, with a few exceptions, to set up a tenancy on a property with an Energy Performance Certificate (EPC) rating of below ‘E’ (the ratings go from A to G). Existing tenancies are allowed to run until 1 April 2020 before the property must be upgraded or, presumably, the tenant kicked out. Exceptions are listed buildings, temporary properties designed to last less than two years (i.e. not much of a buy-to-let investment) or stand-alone buildings less than 50 square metres in size — which might excuse a crofter’s cottage but not much else.

    Labour, however, has just promised to go one better. By 2035, it wants to outlaw the letting of any property with an EPC rating of lower than ‘C’. It is all part of a plan, so it claims, to save four million households £270 a year each in heating bills. That is, of course, assuming landlords agree to upgrade their properties — rather than, as many might be tempted to do, in London especially, to withdraw from the rental market and concentrate on Airbnb lettings. By law, short-term lettings are not strictly tenancies and are excluded from the new rules.

    I support some of Labour’s plans for the lettings market. Giving tenants a minimum of three years’ security, during which time the rent could only be increased with inflation, is a good idea — although I would say that, since I first proposed the idea in a book in 2012. But banning the letting of properties which fail to conform to an EPC rating is quite another thing. In parts of our cities dominated by old housing it could mean hardly any homes being available to rent at all. I did a quick little survey of rental properties on the market for up to £350 a week in WC1 — an area which includes most of Bloomsbury, up to King’s Cross. Not all agents list EPC ratings, in spite of a requirement for rental properties to have a certificate, but of the 30 which did have a rating, six fell into band ‘B’, 15 into ‘C’, four into ‘D’, three into ‘E’ and two into ‘F’. In other words, two of the 30 already fall foul of the rules (and shouldn’t be listed for rent). Under Labour plans, nine could not be listed or let.

    But then WC1 has a lot of new developments and fairly recently refurbished mansion blocks; it is another story in places with a large amount of 19th-century housing. I repeated the survey, this time looking at the 30 most-recent rental properties in Derby, a city I remember as having more than its fair share of grotty bedsits from my time living there in the mid-1980s. Of the 30, seven fell into band ‘B’, three into ‘C’, ten into ‘D’, eight into ‘E’ and one each into ‘F’ and ‘G’ (neither of which should be on the rental market under the new rules).

    Labour’s argument is that landlords will be driven to improve their properties (it is promising grants and loans in order for them to do this). But while it is possible to insulate a 19th-century house with solid walls to modern standards, it is fantastically expensive. A few years ago, I visited an end-of-terrace two-up, two-down in Oxford, which had been insulated in the manner of a new home by a team from Oxford Brookes University. That cost £90,000 — more than the value of similar properties in many towns and very likely more than it would have cost to demolish and rebuild.

    EPC reports are supposed to make practical suggestions about how property owners can improve their EPC rating at a reasonable cost. Yet of the 20 properties in Derby which fell below band ‘C’, according to EPC reports only 12 were capable of being brought up to Labour’s required standard at reasonable cost.

    The other issue is whether an EPC rating means anything. It claims to calculate the cost of heating and lighting a home, but it doesn’t actually measure this — it is based on a crude estimate. I have had two EPC ratings carried out on my own home. The first gave me an ‘E’ rating. I then spent several thousand pounds replacing the windows and this time it came out as ‘F’. So much for improving your rating.

    The government and Labour may have honourable motives, but in practice the changes are likely to harm the lettings market.