Retrofitting our homes is one of the most effective ways to reduce greenhouse gas emissions, improve our health, and reduce energy bills. But under the current expensive and hostile housing system, people simply can’t afford to do it. We look at the deeper changes needed to attitudes, lending and funding models that would help restore a more dignified housing system and green our homes at the same time.
|TL;DR we can unlock funding for retrofits by…
We urgently need to retrofit our homes. The health impacts of leaky, damp spaces cost the NHS £1.4 billion a year. Last winter, at least 3 million households couldn’t afford to keep the heating on. Lack of maintenance and creeping disrepair are used to justify building demolition, forcing people out of homes that should have lasted decades longer. A third of building emissions could be removed by 2030 using retrofit. Retrofitting and decarbonising homes is, as much as any technical intervention ever can be, a silver bullet solution to all these problems. But it’s not being aggressively pursued by our politicians and housing specialists – it’s often not even mentioned. As a result, UK home decarbonisation efforts are proving slow, lagging greatly behind other countries in Europe.
Because home decarbonisation is such an important, all-encompassing idea, policies to encourage it align pretty closely with policies to improve the housing system as a whole. In the following blog, we explore some of the large and small financial interventions that would accelerate climate action in the built environment and tackle deeper inequities in the housing system at the same time.
A cultural shift
The first barrier is a cultural one: given their financial and health benefits, why is retrofit, or any investment in upgrading, maintaining and adapting our homes, so unpopular in the UK to begin with?
Much of this problem stems from the dominant cultural notion of the ‘property-owning democracy’ that has been championed by governments since the 1950s. In the decades prior to this period, mass social homes were being provided for people of all incomes: safe homes viewed more like a right or a public good. But when governments began to prioritise the ownership status and financial value of homes over their condition and affordability, the housing system changed. Governments from the 80s onwards gutted the social housing stock, unleashed the power of finance into the mortgage market, and encouraged private landlords to buy up our increasingly valuable homes. This period of ‘financialisation’ comprehensively reworked our housing system into one defined by scarcity, precarity and speculation; one in which the government was radically less involved. And, of course, it made our homes extremely expensive.
This has had several consequences for modern home decarbonisation efforts. The first is that councils have been confined to regulatory roles and left with limited budgets for maintaining and retrofitting the 4.4 million homes they manage. The second is that the astronomical value of homes means that money can still be made from them regardless of their quality and energy efficiency. This is allowed by law: investor groups like landlords, who manage a fifth of the stock, don’t need (and are not required) to decarbonise homes, or even keep them in decent conditions. As a result, nearly a quarter of privately rented homes fail the Decent Homes Standard, while 60% have an Energy Performance rating of D or worse. Less than a third of landlords are willing to pay more than £500 towards retrofits, despite evidence that the median landlord earned a gross income of £46k in 2021, and a third of landlords have no mortgage debt to pay off. And finally, the rising cost of housing, thanks to financialisation and today exacerbated by Bank of England rate rises, now means that most of us are paying so much on our homes already that any upfront investment in upgrading them, regardless of the payback we might receive from energy savings, is or feels untenable. Homeowners spend 4% more of their income on mortgages than they did just 10 years ago. Private and social renters are usually not even allowed to make changes in the fabric of their home (and private renters who request improvements to the condition of their home are more likely to be evicted).
Financialisation has made housing so expensive and commodified that decarbonising our homes feels impossible. To move back towards viewing homes as homes, not assets, requires a mindset change.
Politicians and policy makers must end their obsession with home ownership being the ultimate social aspiration, and stop blindly targeting rising homeownership rates. Instead, they should move towards the idea that homes are a human right, and that the goal is good, dignified living conditions for all. The headline target should then be tenure parity: equally good living conditions for social renters, private renters and owners. This means all homes meeting the Decent Homes Standard, all homes achieving EPC A, and no-one spending more than 30% of their income on bills and rent or mortgages. And, rather than expecting (or even encouraging) ever-increasing house price rises, the government and Bank of England should target long-term house price stability and deflation relative to wages.
This shift in mindset would move us from an expensive, commodified system towards a healthy, affordable and dignified housing system, steering political discussions away from circular debates about house prices and property ladders and towards more rounded policymaking. For example, tenure parity targets would force politicians to do more about the truly appalling conditions in the private rental sector, and to put proper funding in place for council home creation and decarbonisation. Well-managed, dignified and affordable renting and cooperative homeownership models are a cheap, flexible alternative to homeownership in many countries, not tenures that permanently set you back. Similarly, equal respect for people living in all tenure types would herald an end to policies that prioritise homeownership to the detriment of renters. Right To Buy, for example, has gutted the social housing stock in favour of higher homeownership rates, with many of those homes now in the hands of private landlords, who charge more than councils did. Stabilising house prices would reduce investor interest in our homes, and encourage people to plan their finances around what they need from their home, such as retrofits, rather than simply attempting to stay afloat.
New banking and lending structures
Another way to tackle financialisation is by rethinking bank lending. Regulations on UK mortgage lending and international bank borrowing were peeled back during the 70s and 80s. Where formerly only building societies provided mortgages, now private banks and other lenders could too. They could also tap into international money markets under riskier terms and newer structures – such as the interest-only model that many landlords use today. As a result, more money (in the form of newly created credit) was injected into homes, rapidly inflating prices. We have covered the evidence for this in depth elsewhere, with, for example, an OECD study of 19 countries finding that financial deregulation and expansion of mortgage credit may have increased house prices by as much as 30% between 1980-2005. Compare this to the ~7% increase in house prices that government models indicate would have been avoided were house building targets to have been met.
But this liberalisation also triggered a shift in the role that retail banks played in the British economy: they transitioned from mainly lending to ‘real economy’ businesses, like the contractors and builders who could be carrying out retrofits and heat pump installations, to primarily lending to financial businesses and providing unproductive loans like mortgages. The share of UK bank lending to real economy businesses fell from 23% in 1986 to only 8% in 2023. Efforts to reshape bank lending back towards actual investment in our buildings, services and infrastructure could, therefore, both reduce house price inflation linked to mortgages, and also support businesses offering retrofits and heat pump installations in the first place – which are in urgently short supply.
Shifting bank lending towards home decarbonisation could be encouraged by national policies. Many central banks, though not the Bank of England, offer reduced rate funding to commercial banks if they’re using it for home decarbonisation loans. (In the UK, this could be based on a variation of the Term Funding Scheme, through which the Bank of England lent £127bn to banks and building societies between 2016 and 2018 with the intention of reducing the costs of loans like mortgages. The 2020 TFSME version was tailored to boost bank lending to small businesses.) The Bank of England could also be setting stronger quotas and targets for banks: the EU Mortgage Portfolio Standard obliges European banks to increase the energy efficiency of the homes their mortgages cover in line with Science-based targets. Other G20 central banks limit private banks’ access to central bank funds if they are not meeting energy efficiency and decarbonisation targets.
An even better alternative would be the creation of more local, community-led and stakeholder banks and lending schemes. As researchers at Dark Matter Labs and the Laudes Foundation have pointed out, our highly financialised housing system is also highly individualised: ‘retrofit, in attempting to deliver a collective climate transition of our built environment, still operates within the primarily individualised institution of property.’ In practice, home decarbonisation programmes are most effective when run at local level, they strengthen community networks and contribute to new skills and knowledge in the community. Retail banks can of course lend to community-led schemes, but tend to be less familiar with non-standard styles of housing management. Stakeholder and regional banks offer an exciting new set of possibilities.
Stakeholder banks are cooperatively run or public savings banks. They are often ‘mission-oriented’, with the New Economics Foundation noting that they tend to focus on community needs, promote financial stability and invest in local development more than retail or highstreet banks. They have been found to develop more long-term positive relationships between customers and the businesses they finance, which means they are more able to lend responsibly and usefully – such as to local climate action and health priorities. They are also known to better engage with underserved communities (which would support widening access to energy efficiency schemes). Regional and local development banks, which are far more common internationally than in the UK, similarly offer the potential to more effectively direct lending towards local priorities and small businesses (like retrofit providers and heat pump installers). They can also align with speciality local industries and help retain wealth in underfunded areas.
Accordingly, new lending models are appearing in the UK as part of climate action schemes. Lendology, for example, is a social enterprise based in the UK that manages over £10 million on behalf of local councils, using close customer collaboration to allocate loans for retrofits and upgrades of 1,500 homes. Local authority-issued climate bonds are rising in popularity, as are community wealth procurement structures where councils prioritise local businesses and suppliers on their projects to funnel money in the local area. However, on the whole alternative funding schemes suffer from a bureaucratic funding competition model, budget cuts, fluctuating lending rates and lack of government support for new financing models. The government and Bank of England need to bolster the development of such initiatives, including by providing patient long term capital for their initiation, developing central infrastructure, regulations and guidance to help people to start them and strengthening green finance regulations such that investors support alternative funding and banking models.
Policy, regulations and decision-making
Alongside basic regulatory changes like mandating minimum energy efficiency regulations, there’s a strong opportunity for a wider suite of housing policy changes that boost financing for home decarbonisation projects.
One option is for public bodies to be smarter about how decisions and targets are costed. Decarbonisation costing is typically carried out on an upfront cost basis, with the multiple benefits of retrofit and clean heating – such as their significant benefits for health, or the cost of inaction in terms of climate adaptation – not considered. Government programmes and decision-making should adopt a broader costing definition in relation to energy efficiency and clean heat, learning from the many multivariable tools already out there: the UCL HIDEEM model, Greater Manchester’s carbon-linked cost benefit analysis tool, the Dark Matter Labs civic value of retrofit model, or the Multiple Benefits of Deep Retrofit toolkit used by cities like New York. Broader costing exercises won’t reduce upfront costs, but they will allow users to understand where savings will be garnered elsewhere.
The government should also urgently review its subsidies allocation. The scrapping of VAT on retrofit products and services should be extended beyond 5 years, for example, alongside adjustments to how landlords pay taxes on decarbonisation costs. Currently, the cost of electricity is significantly higher than the cost of fossil gas (sometimes called ‘natural’ gas), perversely penalising those who have invested in heat pumps and clean heating sources. The government must make good its aim to equalise the cost of gas and electricity, moving its subsidies over to clean energy producers and rebalancing levies on bills.
And finally, councils need to take the approaching softening of house prices as an opportunity – and receive funding and access to cheap loans accordingly. Buying up existing homes is essential if we are to expand the council housing stock once more, ensuring more people have an affordable place to live and rolling back some of the financialisation of our homes of the last decades. These ‘Right to Buy Back’ commitments should be coupled with efforts to decarbonisation the newly-bought homes, incorporating them into local authorities’ emerging climate action plans and programmes.
Climate campaigners often talk about a ‘war on retrofit’ to meet 2050 goals; a frenzied effort to install heat pumps and insulation, come what may. But, in reality, many people simply don’t have the money to do this, and have more immediately visible concerns to contend with than poor energy efficiency. Separating climate action policy from basic housing policy will always make both an uphill battle.
Deeper, more long-lasting changes to improve our housing system will unlock retrofit more organically, including reexamining how we talk about our homes, how they are managed and how they are funded. Managing homes as homes, not assets, will make them more affordable and more available, freeing up funds to decarbonise them and putting them in the hands of those who will care for them. Ensuring we have a lending system that provides the right investment to the right places will boost companies that can provide retrofits and heat pump installations, and make these activities cheaper. Aligning our regulatory, decision-making and subsidy system with greener, people-oriented principles will remove the myriad of perverse incentives people face when trying to decarbonise their homes. A healthier, more dignified and cheaper housing system is also a greener housing system.