10 August 2023

How net zero risks intensifying the rental crisis


Polling consistently shows that while people like net zero in the abstract, they turn sour on the idea when they realise it is going to hit them where it hurts – in the wallet.

We saw this dynamic play out in the recent Uxbridge and South Ruislip by-election over Ulez expansion (even though the policy was notionally about air quality, not decarbonisation); we will probably see it again as we draw closer to the 2030 ban on the sale of new non-electric cars.

Personally, I find it hard to get too worked up about this, given that I live in central London and don’t drive. I am, however, a renter. And today brought yet more depressing news for me and my peers in their 20s and 30s: based on the latest Royal Institution of Chartered Surveyors (RICS) UK Residential Survey, ‘rents are likely to continue rising sharply despite the cost-of-living crisis’.

So with recent political events in mind, I find it curious that the connection between soaring rents and climate action has not yet received more attention. I refer to the requirement that all buy-to-let properties must now have an energy performance certificate (EPC) of “C” or above by 2028. The logic here is simple enough – more energy efficient houses require less energy to heat, and so save on emissions, thus helping on the demand side of the net zero equation.

The problem is that in many cases this means expensive retrofitting of old housing stock. Rather than bearing that expense, some landlords are selling up and exiting the market altogether, reducing already constrained supply yet further.

Of course, the rental crisis (as with the broader housing crisis) is fundamentally a result of three decades of not building enough houses because of our terrible planning system. And lots of other factors are relevant too. On the demand side, there’s record immigration (especially of students). On the supply side, rising interest rates, buy-to-let tax changes and pending rental reforms all contribute to landlords exiting the market. 

The range of factors in play makes it hard to work out the precise effect on rents of the EPC requirements. But talk to any landlord and it becomes apparent that it is a major factor in their weighing up whether or not to exit the market.

For example, I know one landlord who is contemplating having to pay £25,000 to upgrade the energy rating of a two-bed flat in a booming Sussex seaside town. The estimated saving is £81 a year. In other words, it would take the landlord 309 years to break even on their investment.

If they want to break even over a more realistic timeline, they’ll have to raise the rent: by £410 a month to break even after five years, say, or by £200 a month after 10 years. In either case, they might very well have to find new tenants. This is hard luck for the current tenants, who will probably have to downsize or move to a less desirable locale – all in the name of net zero, whether they realise it or not.

And it might be that even in this market, finding new tenants is easier said than done, given stagnation in real wage growth. All of which means the landlord’s best option might well be to sell the flat to owner occupiers and take any capital gains tax on the chin, or gift the property to a child or grandchild under inheritance tax laws. Either way, the rental supply would be diminished further.  

As there will be many thousands of similar cases across the country, there is clearly going to be an impact on prices in the rental market. We renters will see our living standards squeezed even further in the name of net zero.   

And sooner or later, voters are going to start making the connection. The problem for younger urban renters is that they are simply not an electoral priority for the Tories in the same way older suburban motorists are, so there’s probably not much mileage in slackening the pace on energy efficiency. Better for the Tories to leave their green credentials untarnished and hang on to some Shire seats. That said, the situation I’ve outlined could throw up an interesting policy dilemma for a future Labour government voted into power by young urban professionals. 

And this illustrates a broader point. While politicians are keen to tout the potential benefits of net zero and a ‘green industrial revolution’, it’s still the case that most of the benefits will come down the line, and most of the massive costs of further decarbonisation will be up-front.

If we attempt to get to new zero through punishing people rather than incentivising and innovating, the politics of net zero will be about redistribution, not of economic growth; of who should bear the pain, not of how we raise living standards for all.

This would matter much less if the economy was growing at a fair lick. But we’ve spent the last 15 years trapped in a low-productivity, low-growth paradigm, made all the worse by Covid and its aftermath. Until we can escape this trap and get the economy growing again, implementing net zero is going to be inherently fraught.

Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.

CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.

Karl Williams is Deputy Research Director at the Centre for Policy Studies.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.