Encouraging investment in energy efficient homes by creating stable housing market conditions
 

 In the United Kingdom, approximately one third of our CO₂ emissions are produced running our homes. Useful reductions in home energy efficiency can be achieved at relatively low cost by simple measures such as blocking drafts and lagging boilers.
But moving towards carbon neutral homes requires major refurbishments such as installing triple glazing, modern boilers and solar powered water heating units.

Owner-occupiers need to have a high level of confidence in the long term (20 – 25 years) stability of house prices if they are to be persuaded to take out large loans to pay for expensive energy saving improvements. This confidence is currently lacking because after a long period when international house price inflation has exceeded general inflation, the global credit crunch threatens a downturn in house prices.

Our proposal aims to stabilise house prices, creating confidence that investing in energy saving improvements will yield a fair return in the long term.

 We will refer to the British market but a similar system could be developed for other markets.

 Background: How the Bank of England currently controls inflation

 The Bank of England is responsible for setting the Bank Rate at a level which keeps national inflation within limits set by the government.
It has to use a single Bank Rate to cover the whole of the UK and all types of inflation.
So when a housing price bubble emerges in one part of the country, say the South East of England, it cannot be suppressed by increasing the Bank Rate without threatening the growth of whole of the UK economy

 Our proposed tweaking of the Bank Rate system, the Surcharge Interest Rate (SIR) offers long term synchronisation between house prices and general inflation.

 How the SIR system would work: Anyone taking out a mortgage to purchase a property would also have to open a Bonded Savings Account. Money could be paid into this account at any time but unless the account holder fell upon exceptionally hard times, money could not be withdrawn until the mortgage had been paid up.
If house price inflation showed signs of outpacing general inflation, the Bank of England would have the power to impose a Surcharge Interest Rate on mortgages. This additional interest rate would only be paid by mortgagees who had taken out a mortgage in the three months prior to the setting of the current SIR.
Unlike normal interest payments that are lost forever, the SIR payment would be transferred to the Bonded Savings Account. 
The payment of an effectively higher interest rate would take the heat out of the housing market, suppressing house price inflation.
 

Minimising the financial burden Buyers only bring the treat of inflation into the housing market at the time they make their purchase, so long standing mortgagees would not have to pay the current SIR.
The system would be backdated by three months, to prevent speculative buying, in anticipation of a pending Surcharge Interest Rate rise.

Once the SIR had returned to a zero rate, the system would start up again, with the most recent batch of SIR payers being freed from future payment obligations.

Focusing on housing inflation hot spots
After the system has been in place for a couple of years it could be refined to operate on a regional basis, eventually being fine tuned to influence house prices at a post code level.

 The SIR could vary at a post code level, because irrespective of where the mortgage is taken out, the location the property remains fixed.

The SIR system would be particularly useful in large single currency territories such as the Euro and US dollar zones, because it would decouple local control of house price inflation from the bank rate set for the whole of the currency zone.

In part, the SIR mechanism is a psychological confidence building measure. Its present will assure the markets that in the long term, house prices will keep in step with general inflation. This will reduce the benefits of speculative buying, consequently reducing the need for regular surcharge interest rate intervention.

Funding energy saving home refurbishments
After the scheme has been running for a number of years and economists have learned how to use it effectively as an inflation controlling tool, the bonded funds could be released for approved energy saving refurbishments. 
The money could be used to provide retrospective finance for any approved refurbishments, in order to encourage owners to improve the energy efficiency of their homes at the earliest possible date.

Stamp duty
This is a British form of taxation  paid when purchasing a home.
It has recently been proposed that stamp duty should be abolished for first time buyers, in order to reduce costs when purchasing a first home.
Although well intended, it could have the reverse effect.
Increasing the funds available for purchasing homes without increasing the number of homes on the market will only lead to house price inflation.

The government will have lost a useful source of taxation, without house buyers gaining a complimentary benefit.

A more effective proposal would be to refund the stamp duty into  Bonded Savings Accounts.  Early access to these funds would be allowed for the purpose of energy saving home improvements. This would help first time house buyers financially by reducing their fuel bills. The international community would benefit from the reduced levels of CO₂ emissions.
If their new home was already carbon neutral, the purchaser could be allowed to use their stamp duty refund in other ways that are environmentally friendly, for example purchasing and running a battery powered vehicle or buying  season rail tickets.

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