The Budget unleashed the biggest change to the housing market in a generation – but no one is talking about it
Joel McInnes
Making Sustainability A Strategic Advantage For Your Business | Sustainability & Climate Consultant | Chief Sustainability Officer at Sustain 2050
For all the talk of budget surplus, tax loopholes, cost-of-living adjustments and changes to superannuation, the most impactful changes from this year’s Budget season might actually have been released three weeks ago in an obscure press release from Treasury.
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OK – what did we miss?
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At the end of April, Commonwealth Treasury hosted an investor round-table in Brisbane with the goal of pushing private capital into projects aligned with the national climate agenda, of meeting our Paris commitments and achieving net-zero emissions by 2050.
Three initiatives were adopted:
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And then on Tuesday night came an additional $4b of new government spending on energy efficiency, in particular:
4.?????$300 million in funding to be matched by the states for a total of $600 million to upgrade the energy efficiency of social housing.
5.?????$1 billion for Clean Energy Finance Corporation to provide green finance for residential home electrification and energy upgrades.
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Yeah –so what?
Why is this such a big deal? Isn’t it just a bunch of social spending to make our homes more energy efficient and eventually reduce our electricity bills?
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No. It’s far more impactful than that. Here’s why.
What I’m concerned with here is the effects of improved energy efficiency on the housing market.
Our choices as to why and how we buy, sell, rent and improve our homes, and how we borrow to fund all of this.
Australia is finally starting her journey towards energy transition, joining the likes of the EU, albeit more than 20 years in arrears.
And since we’re following the same path the Europeans have travelled before, we’ve got some clues as to how this might play out.
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Changes in house prices
The expansion of NatHERS energy ratings scheme for homes means we’ll soon see the same sort of energy rating sticker browsing a Domain listing as you already see on a fridge on sale in the Harvey Norman showroom.
This energy rating sticker and the increased transparency it will provide means we’ll see a growing divide in valuations between energy efficient and inefficient homes.
Before you buy, you'll be able to judge just how much it will cost to heat that house.
Higher rated houses will command a premium, and will take less time to sell.
Domain already thinks this differential is worth $125,000 for houses, while in Germany, the Bundesbank sees almost a 30% difference when comparing the prices of the median energy efficient house to the most advanced ones.
Real estate portals like realestate.com.au will respond by incorporating the NatHERS badge as a central feature on their ads. Buyers will come to expect to see the rating, punishing those listings that fail to disclose with lower interest.
It goes further in the rental market.
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Beyond just influencing a renter’s choice between houses, offshore experience suggests a hard minimum energy efficiency rating for rental stock, below which a landlord will be forbidden to rent out.
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Changes in the way banks value credit risks
The corollary to a change in home valuation is a change in the valuation of the collateral that sits behind all of our mortgages. And when anyone mentions changes in collateral values, banks get the yips.
Credit risk management for banks is the likelihood of default combined with the loss given a default. While energy efficiency and climate more generally has no relation with the former, it certainly changes the arithmetic around the latter.
Treasury has been encouraging banks to take a broad suite of climate risks into account as part of their credit risk processes. I think the banks would have started doing this anyway.
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Changes in the way we borrow – say hello to green mortgages
With the NatHERS rating scheme providing a robust way to quantify a loan's climate risk when it comes to energy efficiency in housing, expect to see this lead into an explosion in discounted green mortgages. Banks are always looking to attract the highest-quality borrowers and will use a green mortgage discount to do so again.
CBA and NAB have dabbled in green mortgages in the smallest way thus far, and Westpac announced their intention to issue a green mortgage the day after the Brisbane investor round table.
We’ll see green mortgages soon priced as a function of the NatHERS star ratings.
A mortgage on a 7-star rated home might attract a 50bp discount to a 5-star rated home to the same borrower, while a less efficient 3-star rated home might even be penalised with some version of additional lender’s mortgage insurance, further exacerbating the sale price differential on the home itself.
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Changes in capital charges within banks.
Whenever banks issue a loan, they are required to allocate a portion of their capital to be held against the risks of that loan. The higher the risk weighting of the loan, the more capital the bank needs to hold.
Just as climate risk will be an input into pricing new loans, these factors will also be used to calculate the risk weightings of legacy loans. Banks will have a strong incentive to encourage homeowners to improve the energy efficiency of their homes as a way to improve quality of loan collateral.
Loan products such as ANZ New Zealand’s Good Energy loans will be launched into the market as a way to finance this transition.
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Changes in the market for home renovations.
Buyers will have transparency between efficient and inefficient houses. Borrowers of the best homes can switch to a cheaper green mortgage. Sellers of efficient houses can extract a premium as they sell their homes.
But what if you’ve got a home with poor energy efficiency and want to increase its value?
What if you just want lower electricity bills?
We can expect an increased demand for green-focused renovations, simply to improve the energy efficiency of our homes. The research on “what’s the best bang for buck” in an Australian context has been done, while in the UK, the broad expectation for payback is 6.5 years.
And then consider the $1b that has been allocated to the Clean Energy Finance Corporation to lend out to homeowners to fund these renovations, alongside the $600m that is earmarked to renovate affordable housing, you start to see the scale of the opportunity.
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Taken together, these changes will eventually represent the most impactful changes to the Australian housing market since the introduction of the first home buyers grant in 2000.
It might not be overnight, but it will change everything that touches the housing market.
From what we buy or rent, to how much that costs, to how we finance it, and even through to how banks treat those loans.
After a decade of inaction by a Liberal Federal Government, the announcements of this Budget season on energy efficiency in housing and green energy transition more broadly will be felt for decades.
The housing market will look very different to the one we know now. It's about time too.