After decades of foot-dragging, the UK construction industry has begun to see the importance of good insulation and higher environmental performance. Large housebuilders are beginning voluntarily to build their major developments to a better standard than required by building regulations.

Housebuilders also see the increasing commitment by government to increasing the mandatory standards for home insulation and other environmental characteristics. By 2016, all new homes will have to be ‘zero carbon’.

A report just released by estate agents Knight Frank examines whether buyers are prepared to pay the cost of the eco-improvements. The answer seems to be a cautious ‘yes’.

***

Government is rapidly increasing the pressure on housebuilders. For decades we have seen the construction industry fiercely resist increases in the minimum standards for new homes. Small changes in the building regulations were fought over for years. Government generally caved in. On one extraordinary occasion some years ago, the current building minister, Yvette Cooper, agreed to water down an improvement in insulation standards, claiming the change was ‘gold plating’. The standards would still have left the UK well behind the performance of almost every other country in northern Europe. About a quarter of all the UK’s emissions come from the energy consumption in domestic homes, so comprehensive action is well overdue

Central government now appears to understand the lamentable UK record in building new homes to a reasonable standard. The new ‘Code for Sustainable Homes’ sharply ratchets up insulation standards in the period to 2016. Developers are supposed to get to Level 3 of this code by 2010 and Level 4 by 2013. Energy use at Level 3 must be 25% below current standards, rising to 44% for Level 4.

These targets are relatively simple to achieve. Berkeley Homes has already committed to get to Level 3 on all developments beginning in 2008, several years in advance of the requirement. Getting to levels beyond 4 may be much more difficult. Level 6 requires the home to have no net use of energy at all. All fuels taken from the electricity or gas grids must be balanced by on-site or near on-site generation.

Knight Frank’s report provides the following illustrative figures for the incremental cost of achieving the various levels. (For the purpose of comparison, the average price at which UK houses are currently selling is about £185,000 - source Nationwide)

Extra cost per unit

	Housing	Low-rise flats	High-rise flats
Level 3	£5,000	£3,500	£6,500
Level 4	£15,000	£8,500	£17,000
Level 5	£26,000	£34,000	£36,000
Level 6	Unknown	Unknown	Unknown

The estate agent does not cost Level 6, saying it is unclear how housebuilders are going to achieve the target.

In a previous edition of the newsletter, we looked at a row of eco-homes under construction in the Oxfordshire village of Bladon. The developer gave us an estimate that the additional cost was about £40,000 per unit. The houses would achieve the top end of Level 4. The figures in the table above should probably therefore be seen as costs only achievable when the industry has acquired substantial experience and skills at delivering the new standards.

The numbers show that Level 4 will add a significant but probably manageable amount to the costs of construction, even though for high-rise flats the costs will be surprisingly high. Getting to Level 5 for flats will be much more expensive. (I believe that flats will be more expensive than houses because it will be more difficult to use microgeneration to achieve emissions reductions.)

The extra costs imposed by the new regulations could either be paid for by increasing prices, lower developer margins, or lower land values. Buyers should, at least in theory, be prepared to pay a small premium above what they could afford for a less-well-insulated home because their yearly outgoings will be lower. Level 4 homes may reduce fuel bills by perhaps £250 a year. It is probably not worth paying more than about £8,000 for this benefit. The remainder of the cost will probably be absorbed in lower land prices.

What are the attitudes of buyers? During August and September 2007, Knight Frank asked homeowners about their attitudes to ‘eco’ features. Perhaps the most interesting comparison was the difference in the number of people who had seen ‘environmentally friendly features’ as important when buying their current property (43%) compared to the 79% who say it is important for a future purchase. In other aspects, householders aspirations for a future house were similar to their objectives when buying the house they live in now.

Respondents were also asked about their underlying attitudes to sustainable homes. Younger people were likely to associate eco-homes with other desirable attributes such ‘modern design’ features. Over 75% of people under 40 linked good environmental features with ‘value for money’. One developer of eco-friendly homes (R.gen) provided data to Knight Frank showing that only 20% of its buyers were over 35, but this may be more to do with R.gen’s portfolio of smaller flats and city-centre developments.

Some outstanding modern houses with good insulation and other eco-features can achieve 20% premiums to houses of similar size and location. But Knight Frank’s research showed a generally more limited willingness to pay extra for eco-homes. 41% said they would be prepared to pay no more, and only 10% could envisage paying 6-10% more. Given that most buyers are extremely financially stretched at current UK house prices, this may be no surprise.

Percentage of home-buyers willing to pay a premium for eco-homes

Premium	Buyers willing to pay
None	41%
1-2%	32%
3-5%	17%
6-10%	10%

But asked in a slightly different way, over 80% of respondents were prepared to pay a premium for lower running costs.