High interest rates aren’t the only reason for the house price slump

To no-one’s surprise, house prices fell again last month. Average prices were down by 0.4 per cent in September, according to Halifax, with the typical property now worth £278,600 compared with the peak of £293,500 in June 2022. Much of this, inevitably, has to do with high interest rates. For three decades until last year the housing market was pumped up by a downwards trend in interest rates, which increased the amount that buyers could borrow. Now that has come to an end, buying power is contracting. There is unlikely to be any rapid recovery. If rates remain high – and gradually it is dawning on markets that this is likely to be the case for far longer than previously expected – then we could be in a housing bear market for years to come.

But there is another factor at play: older homes are becoming blighted by poor ratings on an Energy Performance Certificate (EPC). Last month, Rishi Sunak relaxed rules requiring mortgage lenders to ensure that half the properties they lend against have an average EPC rating of ‘C’ or above by 2030. Yet several lenders have chosen to stick with the target anyway – perhaps fearing that a Labour government would reimpose it. As a result, it is becoming harder to secure a mortgage on the millions of homes which do not meet the required standard. Expensive works may need to be undertaken before the property can be sold.

According to government figures, 47.6 per cent of homes in the second quarter of 2023 had a rating of lower than C. But the real situation is almost certainly a lot worse than this. These figures refer only to the EPCs undertaken during that period. We don’t have figures for the overall housing stock because there are still many properties which have never been assessed for an EPC as they have not come up for sale or rent during the past 15 years when the requirement to have an EPC has been in place. Needless to say, the properties which don’t have an EPC tend to be older, draughtier homes. When they do eventually end up on the market, however, their vendors may be in for a shock.

The problem is compounded by the lousy accuracy of EPCs. They are hardly a genuine measure of how much energy is required to heat and light a home; rather they are a crude estimate arrived at by an assessor observing – and often guessing – about the structure of a home and feeding the details into a standardised computer model. I have seen two flats in the same converted Victorian building, one of which had been given a ‘B’ rating on the basis that there was ‘wall insulation (assumed)’ and the other given a ‘D’ on the basis there was ‘no wall insulation (assumed)’. Pure guesswork is the difference between one of these properties being mortgageable and the other not.

If half the homes in Britain become blighted through poor EPCs, it does not bode well for the housing market.