Higher Standards for Housebuilders Do Not Slow Development

The Truth has Been Revealed by Scottish Developers

NOTE - a new blog with updated data is available here

Housing developers say that if you make them build more energy efficient homes, they'll cost more and less houses will be built.

Our politicians have swallowed this argument hook line and sinker time and again.

I've written about this before - the flaw in the argument is the assumption that the developers costs have to rise. They don't. This is because one of the main costs of building the house is what you pay for the land, and if everyone is faced with the same regulations, then the value of the land is driven down and the landowner makes a slightly smaller profit from the deal.

Developers have successfully held up tighter building regulations on numerous occasions.

• The update to building regulations in England in 2012 ended up as only a 7% reduction in carbon emissions (compared to the significant cut required in the original zero carbon homes policy)
• In Scotland in 2012 there was no energy efficiency improvement at all.
• The Housing Standards Review resulted in legislation in 2015 with the intent of limiting local authorities powers to require higher energy efficiency homes through planning (legislation that is still not in force).
• Finally, after 10 years of clear policy direction, one of George Osborne's last acts before disappearing off to take lucrative directorships, was to tear up the Zero Carbon Homes plan (the existence of which had been mendaciously used to justify the changes in the Housing Standards Review).

So it's very interesting to see what's been happening in Scotland. After many years of shadowing Westminster on building regulations (apart from the obvious requirement to go just a percentage point or two lower on carbon emissions to make a point), Scotland really pulled ahead with its changes to regulations in 2015.  The graph at the top of this piece shows the gap opening up.

If developers' claims that higher levels of regulation would stop housebuilding in its tracks were true, you'd expect housebuilding in Scotland to have gone off a cliff.  Has it?

Has it hell.

The Merton Rule is Not Dead, Long Live the Merton Rule!

Can Local Authorities Still Require Energy Efficiency Higher Than Building Regulations?

The largest housing developers would very much prefer it if they were able to build the same house in Aberdeen that they build in Abingdon. If they can do this, then the cost of the architect and engineers to design their standard properties can be spread across more units, and their buying power can be increased by using the same component parts in every house they build. This is one of the ways they out-compete smaller, more local building companies.

For this reason they dislike local rules and regulations that affect the houses they build.

In 2008 UK government enacted the Planning and Energy Act, which among other things clarified that local planning authorities had the legal right to require energy efficiency standards in new homes that exceeded the national building regulations. This approach to pushing developers to build housing with an energy performance beyond the national minimum had become known as the 'Merton Rule' after the local authority in London that had pioneered the approach.

Here's what the Act says:

1  Energy policies

(1)A local planning authority in England may in their development plan documents, and a local planning authority in Wales may in their local development plan, include policies imposing reasonable requirements for—
(a) a proportion of energy used in development in their area to be energy from renewable sources in the locality of the development;
(b) a proportion of energy used in development in their area to be low carbon energy from sources in the locality of the development;
(c) development in their area to comply with energy efficiency standards that exceed the energy requirements of building regulations.

It has been estimated that around 50% of local authorities took advantage of the new clarity to build such requirements into their local plans.

National builders didn't like it. They didn't like it at all. Different local authorities chose to ask for 10% renewable energy on site, 20% renewable energy on site, Code for Sustainable homes level 4.

The national developers were faced with different requirements up and down the country, a situation further complicated for them by the fact that different local authorities enforced their planning requirements with different levels of enthusiasm and competence. In some areas, particularly those areas that combine both high housing need and low house prices, developers might find a planning requirement for renewable energy on new developments to be highly negotiable. Other local authorities, notably in the south, with high house prices that means developers are queuing up to build new homes there, have been far more successful at holding the line on the aspirations of their development plans.

It could be argued that this is exactly as it should be. The UK has very high geographical differences in house prices. Local authorities could set their local planning regulations to achieve the highest energy performance that was consistent with the economics of housing development in their area, specifically whether the value of development land is sufficient to cover the additional costs of more efficient homes.

However, in 2015 things swung back towards the large developers. The government of Cameron and Osborne announced a 'bonfire of regulations' to free business from costly red tape. The Housing Standards Review was formed to look at red tape afflicting the house builders. Developers successfully argued that this patchwork of local planning requirements was 'red tape' and the review concluded that it should be swept away.



The government chose to add the changes to the Deregulation Act 2015. Section 43 of this Act amends the Planning and Energy Act as shown below.

43 Amendment of Planning and Energy Act 2008
In the Planning and Energy Act 2008, in section 1 (energy policies), after subsection (1) insert—
“(1A)Subsection (1)(c) does not apply to development in England that consists of the construction or adaptation of buildings to provide dwellings or the carrying out of any work on dwellings.”

This amendment would remove the ability of local authorities (in England only) to require developers to exceed the building regulations for energy efficiency. Note that sections 1(a) and 1(b) remain, allowing local authorities to continue to require that a percentage of the energy consumption of a new development to be met with renewable or low carbon energy.

The passing of the Deregulation Act is, however, not the last word in this story. If you work in a local authority in England and a housing developer is telling you that you can't impose higher standards than building regulations on a development, they're wrong. The fact is that section 43 has not yet been brought into force, so the original Planning and Energy Act text still applies.

If you look at the Commencement Section of the Deregulation Act, you'll see how the various elements of the Act are to be brought into force.

Some sections come into force on the day the Act is passed in parliament, others some set number of months later. No special mention is made of section 43, so it falls under this provision:

(7)Except as provided by subsections (1) to (6), the provisions of this Act come into force on such day as the Secretary of State may by order made by statutory instrument appoint.

A check of statutory instruments shows that this has not yet happened for Section 43, fully two years after the Act itself was passed by Parliament.

In fact, during a Lords debate on the Neighbourhood Planning Bill, in response to a question by Baroness Parminter, Lord Bourn confirmed that it was the case that local authorities still have powers to require higher building standards:

"The noble Baroness asked specifically whether local authorities are able to set higher standards than the national ones, and I can confirm that they are able to do just that."

So there you have it, the Merton Rule lives on!

 Local authorities still have powers to drive low carbon development in England, and it's just as well because our central government seems to have lost the will to do so. It's down to the sustainability officers and planning officers to enforce their local plans and they have the power to do so.

The Residual Valuation Model

Why Legislators Have Nothing to Fear from Tougher Building Standards

Simple isn't it? A chain of logic that seems irrefutable.

Legislate to make developers build better (low energy) homes and their build costs will rise.
These homes will not command a higher price, because the market is dominated by the price of existing homes for sale.
So the developer will make less profit.
Less homes will be built at a time when the country desperately needs them.

Our politicians have been buying this argument again and again from well-funded lobbyists working on behalf of housing developers.

The flaw in the logic is the assumption that the developers costs have to rise when you increase building standards. They don't. This is because one of the main costs of building the house is what you pay for the land, and if everyone is faced with the same regulations, then the value of the land is driven down and the landowner makes a slightly smaller profit from the deal.

The windfall from selling land to developers is so significant that a small decrease in the value is not going to slow down the market.

Merton Rule Lives on

Housing Standards Review Steps Back from Brink

Image: Viridian Solar

The Department for Communities and Local Government (DCLG) has concluded its Housing Standards Review and contrary to expectations the so-called Merton Rule, whereby Local Authorities can specify that new homes generate a certain portion of their energy use from renewable sources is retained.

 Part of the government's 'Red Tape Challenge', the Housing Standards Review (HSR) was wide-ranging and covered issues from wheelchair access in new homes, their consumption of water and use of energy.  The starting point of the review was that there has been a proliferation of different standards and that this is costly for both housing developers comply with and for Local Authorities to police.  DCLG proposed a number of ways in which it might simplify matters.

The consultation published in the autumn contained a serious threat to the deployment of renewable energy in new homes.   (See my earlier blog and infographic). 

After a series of changes in which the energy efficiency of new homes improved rapidly, progress has completely stalled since the coalition government came into power.  As a result, current building regulations can easily be met without renewables.  The only driver to encourage developers to use renewables in new homes is that many Local Authorities require it as a planning condition (often called the ‘Merton Rule’ after the first Authority to pilot the idea).  They can do this because they were granted the power in the Planning and Energy Act 2008.

Many Local Authorities have adopted planning policies like this as part of their Local Plans with the goal of creating local skills and supply chains, mainstreaming renewables and encouraging their wider adoption.

The HSR consultation document proposed to remove this power, potentially leaving renewable energy in new homes out in the cold until the building regulations reach 'Zero Carbon' and this feeds through into actual projects – potentially as late as 2022.

The Impact Assessment that accompanied the HSR consultation gave a clear indication of what was influencing DCLG’s thinking.  The anticipated ‘savings to industry’ only counted the reduction in the costs of housing developers.  The business lost by the renewable energy industry was not considered, and nor were the savings on energy bills for the householders. 

 Housing developers were offering a narrative that was both simple and attractive to the politicians:

 "Free us from these unnecessary costs and we'll build a way out of this recession."

It was very clear who was in the driving seat.

As the civil servants at DCLG worked their way through the responses to the consultation and pondered their conclusions the country was gripped first by a debate on the affordability of energy bills and then by endless rain, flooding in Somerset and politicians in wellington boots trying to outdo one other on how serious they consider the threat of climate change.

Was it these events that influenced the outcome – the idea that DCLG could find itself ordering underwater Local Authorities in Somerset to tear up their climate change policies? 

Or perhaps the rash of record profit growth announcements by house-building companies undermined the argument that costs had to be cut to get Britain building again?

Or maybe it was the work done by the Solar Trade Association and Renewable Energy Association to present the arguments for including renewable energy as houses are built?  (Step forward Mike Landy and Leonie Greene).

 Who knows what the decisive factors were, but on Thursday 13th March, the decision was announced and the Merton Rule lives to fight another day.

Untangling the Announcement

The way the decision was announced has caused some confusion, especially because the Written Ministerial Statement said that there would be no optional additional local standards:

This caused a number of sources to wrongly report that the Merton Rule had gone.  A bit of digging shows that the opposite is true.  The new rules are to be enacted through the Deregulation Bill.  Here's the relevant section:

To understand the impact of the changes, you need to read it with the Planning and Energy Act 2008, shown below:

So it can be seen that the change only affects Section 1(1)(c), and prevents Local Authorities in England (only) from requiring energy efficiency standards higher than building regulations for houses (only).  Crucially for renewable energy sections (a) and (b) are left intact and Local Authorities can continue with planning conditions that require a proportion of energy from renewables providing a critical bridge to Zero Carbon Homes.

Attention now turns to the definition of Zero Carbon Homes, encouraging DCLG to deliver it on time and how much of the standard can be 'bought-in' rather than 'built in' through a process called 'Allowable Solutions'.



Infographic - Slow Progress on Low Energy Housing in UK

A Million Missing Low Energy Homes

The "Housing Standards Review" is set to eliminate a crucially important driver for renewable energy uptake in the UK and the way the government has gone about it is an absolute disgrace.

Solar panels on new homes - soon to be a thing of the past?

In a recently launched consultation, the Department for Communities and Local Government (DCLG) has revealed its intention to halt a practice where local authorities can require property developers to build to an energy efficiency standard higher than the current building regulations or insist on renewable energy (the so-called Merton Rule).

The background to the Housing Standards Review is that there has been a proliferation of overlapping (and sometimes conflicting) technical standards created in recent years, and local authorities are imposing a variety of these on developers, creating an unnecessary regulatory burden.  

DCLG convened a series of working groups covering eight thematic areas, one of which was energy.  The Energy Working Group concluded that the government should scrap rules that allow local decisions on the energy efficiency of new construction and rely solely on the national Building Regulations to drive future improvements in new build housing.

The justification for this change is that the Building Regulations are ‘moving towards Zero Carbon Homes’ by 2016 so there’s no need to have these alternative requirements – you can’t get better than zero carbon, right? 

While this argument is superficially persuasive, as soon as you scratch the surface you quickly find otherwise – let's take a look at what’s been happening at DCLG since the ‘Greenest Government Ever’ came into power:

• New Social housing was intended to be at zero carbon by 2013, paving the way for the commercial developers to follow.  This was scrapped and social housing is now built to the same energy performance as commercial housing.
• The definition of a ‘Zero Carbon Home’ has been diluted so that electricity use from plug-in appliances is misleadingly not included, making it more like ‘30% Carbon Home’
• The 2013 building regulations are late and will not be implemented until well into 2014, allowing at least 100,000 homes to be built to a lower energy efficiency.
• These new regulations represent only a tiny (6%) improvement on the previous ones for energy efficiency, when a 50% improvement was required to have any realistic chance of delivering 30% Carbon Homes by 2016.
• The ‘Allowable Solutions’ consultation may allow developers to pay a tax instead of building genuinely low energy properties.

(See my earlier blog on progress towards Zero Carbon Homes here)

If you had a suspicious mind, you might suspect that DCLG held back on the spectacularly unambitious 2013 building regulations to allow the Housing Standards Review to reach its conclusions based on a belief in government intentions to actually deliver Zero Carbon Homes in 2016, a belief that would have been difficult to continue to hold once the 2013 regulations were revealed.

If you were also of a cynical disposition, you might predict that DCLG is going to announce that it will put back Zero Carbon Homes to 2019 (just keeping within the 2020 deadline in the EU Energy Performance of Buildings Directive), but only after leaving the 2016 target in place long enough to use it to justify killing off local rules for higher energy performance and renewable energy.

Houses are not built to new regulations immediately; it takes many years until granted planning permissions turn into completed homes.  If Zero Carbon Homes is delayed until 2019, it will be 2022 before large numbers of homes are built to this level of performance.  DCLG will have created a ‘Lost Decade’ and a million homes built with unnecessarily low energy efficiency.

Economics not your Strongest Suit?

The ‘Impact Assessment’ for the changes proposed in the consultation claims a net benefit to the economy of more than £0.5bn.  It is claimed that £93m would be saved over the next 10 years by abolishing the Code for Sustainable Homes and £195m from abolishing local targets for renewable energy.

So that’s around £30m a year.

To put this saving in context, have a look a the turnover and profit of just the top three commercial housebuilders in the UK:

 

Source: Barratt Homes plc, Taylor Wimpey plc, Persimmon Homes plc

The Impact Assessment claims that this £30m/year is the ‘net benefit to business’, but what it actually presents is the net benefit to property developers, who no longer have to pay for environmental technologies or renewable energy. 

An Impact Assessment should assess the benefit to the economy, not one favoured sector. 

The businesses that would have supplied environmental technologies to help these new homes outperform the Building Regulations will be adversely affected, but the Impact Assessment takes no account of this.  Nor does it attempt to estimate the cost of improving these low efficiency homes later on. 

The Impact Assessment in support of the proposal is flawed and should be repeated taking into account the net effect of the changes on the whole economy.

Not Helping Anyone…. Except Rich Landowners

If building regulations are clearly signalled in advance and consistently applied, then developers can decide how much to pay for land with certainty about their build costs.  So the only thing building to a higher environmental standard will do is slightly reduce the massive windfall that landowners get when they convince a local authority to allow them to sell to property developers.

Conversely, if building costs are reduced then developers, in a competitive market for building plots, will bid up the value of land to a point where their profit margins are maintained. 

I’ve already written about this, often overlooked issue here: 'Who Pays for Greener Homes?'

Surely this isn’t the government’s intention?  To hamper the development of a clean energy industry and land the country with extra costs for upgrading homes that could have been built to a higher standard of energy efficiency – all so that a few rich landowners get a bit richer.  Not this government, surely?

Whatever Joined up Government Looks Like, it Ain't This

At the same time that DCLG is busy paving the way for a million low-efficiency homes, another government department has to shell out taxpayers’ hard-earned money to financially support people in improving the energy efficiency of existing homes.

The Department of Energy and Climate Change (DECC) is spending your money trying to convince people to upgrade the energy performance of their homes.

And boy is it hard work.

It is simply much easier and cheaper to install energy efficiency into a new home as it’s built rather than doing it later once someone is living in it.  It’s ‘common sense’ isn’t it?  It’s so much simpler to do it properly the first time than have to come back and do it all again later.

Compare the cost of putting thicker insulation into the wall as its built with the cost of fixing more insulation to the outside of a building, rendering it, and re-setting all the windows.

Or the hassle of getting a rig into your garden to drill a bore hole for a ground source heat pump – knocking down walls, tearing up your beautiful lawn – compared to doing it when it’s already a building site.

Or the cost of replacing all your radiators, - suitable for a gas boiler, but not big enough for an air source heat pump - compared to installing suitable ones in the first place.

Consider the cost savings from installing solar panels in the roof at the same time as the scaffolding is there for the roofers to tile the roof.

You get the idea.

DECCs incentives such as the Feed in Tariff, Renewable Heat Incentive, and Green Deal need to be set at an even higher level than simply supporting the extra costs to overcome people’s aversion to turning their house upside down to do the improvements.  (So called barrier costs).

The lack of progress in driving up standards in new homes is going to cost the country more in the long run.

How to Fix This

A situation where each and every local authority makes up its own environmental targets is an unnecessary burden on developers.  In my own business, we’ve helped many house builders discharge local authority renewable energy requirements in all parts of the country, and while they are all similar they are also all ever-so slightly different.  There is definitely a case for simplification.

However, the Building Regulations are not providing a pace of improvement that is sufficient.  Nor is the Zero Carbon Homes ‘end point’ adequate – the definition is too weak and proposals to allow property developers to ‘buy’ their way to Zero Carbon will result in homes that are little improved over today's.

The Building Regulations are not some 'gold standard' for energy efficiency that it is impossible to improve upon, they are nothing more than a minimum standard, a lowest common denominator.  Local authorities should be encouraged to exceed this minimum standard  where is is viable, and the assessment of viability should be a local decision in keeping with the DCLG's own Localism Act.

The route to simplification is not for central government to impose a one-size fits all, lowest common denominator standard, but instead to provide a limited menu from which local people can choose.  Fortunately the hard work has already been done because this is a description of the system in Scotland.  Here the building regulations have a special section with a limited number of alternatives to the minimum standard (Bronze) so providing local choice and simplification of regulatory burden for developers at the same time.

See my earlier blog on what we can learn from sustainable construction in Scotland here.

Why not adopt or adapt this sensible Scottish idea for the rest of the UK?

UPDATE
How to make your views known to DCLG, with template email can be found here