Is it time to focus on buildings if we want to solve the energy crisis?

Appetite for building new homes in Hungary has been too slow to help the country in its efforts to wean itself off energy imports. Since 1991, the annual renewal rate of the total housing stock has exceeded 1% only once which leaves Hungary’s housing stock more obsolete than the EU average. Substandard properties are associated with higher energy consumption. It means Hungary will not move towards energy independence before households speed up constructions of their home. However, recent improvement seen in the top 15% of energy-certified housing stock is a cause for hope.
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Improving the quality of Hungary’s housing stock can make a major contribution to improving Hungary’s energy independence. The share of households in the final energy consumption has always been high, ranging from 34-40% in the last 30 years since the change of regime, while in the European Union it has been much lower (26-29%). According to 2019 data, 71% of the final energy consumption in households was related to heating, but the amount of energy required for this depends largely on the energy characteristics of the property.

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According to the Ministerial Decree 7/2006 (V. 24.) TNM (minister without portfolio), from 1 July 2022, the minimum energy rating BB will be a prerequisite for the occupancy of residential buildings, which is expected to contribute greatly to reducing the energy consumption.

However, the rate of renewal of the housing stock does not paint a promising picture of a significant improvement in its energy quality. The renewal rate shows how many years the total housing stock would need to be fully replaced, depending on current building construction figures. On this basis, a value of 1% would mean, for example, that 100 years would be needed to renew the total housing stock.In the last 30 years, the annual renewal rate has exceeded 1% only once, and in the last 10 years it has reached even half a per cent only once, which indicates a significant obsolescence.

As the number of handovers of new buildings is influenced by many macroeconomic factors and regulatory actions are relatively slow to take effect, it is also worth looking at the renewal rate using a 10-year moving average. Its value has been falling steadily since 1995, except for the last two years. In 2021, the renewal rate was 0.33%, only slightly higher than the low of 0.30% in 2019. This means that the total housing stock would take 303 years to fully renew based on the 2021 values.

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It is worth noting that increasing the number of new homes is only one possible way to achieve energy efficiency targets. The deep renovation of outdated residential properties could be another key to increasing the share of energy-efficient properties, bearing in mind that a deep renovation is typically more cost-effective and uses fewer natural resources than building a new dwelling. According to a 2021 study by the Hungarian Energy Efficiency Institute, 3.7 million homes in Hungary need to be renovated to meet the 2050 climate neutrality targets, which means 100,000 to 130,000 homes per year.

The future of the energy market, the potential of renewable energy, and challenges of the green transition will also be discussed at Portfolio's Sustainable World 2022 conference on 6 September!

The weak outlook for improvements in the building stock also underlines the need for the MNB’s energy efficiency programmes. Under the green mortgage bond purchase programme, the MNB has purchased nearly HUF 61 billion of green mortgage bonds to finance green real estates. Under the Green Home Programme, HUF 200 billion of preferential loans have been made available by credit institutions, the amount of which was further increased by HUF 100 billion in April 2022 by the central bank. The MNB has granted preferential capital requirements to credit institutions for HUF 10.5 billion of green housing loans under the green preferential capital requirement programme. The latter will be extended later this year to include energy renovations.

Information on the quality of the housing stock can be obtained from the distribution of energy performance certificates that must be issued when a property is occupied, sold or rented, where the minimal energy need (AA++) rating is the best and the extremely bad (JJ) rating the worst. Based on the more than 900,000 energy performance certificates issued since 2016, there is a significant gap in the energy quality of the total housing stock:

almost 65% of the total stock had an energy rating below close to modern (DD) at the end of 2021.

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The European Union’s Taxonomy Regulation, which regulates sustainable investments, and its supplementing Regulation, which defines the mitigation and adaptation activities in respect of the climate change, determines that the financing of which residential property is considered sustainable financing, aligning with the EU Taxonomy.

Based on the available certificates, 24% of the total housing stock achieves at least the CC rating, which is the first class that is considered state-of-the-art.

Looking at the annual composition data, the steady increase in the share of properties with a minimum CC rating in a given year stalled in 2021, mainly due to a decrease in the share of properties with a CC rating in 2021. The falling back to the 2016–2017 levels could be explained by the decline from the high number of new dwellings built in 2020 to the average level of previous years. On the positive side, the share of properties with a BB or superior rating is steadily increasing: their value is 3.2% of the total stock, while these high-level energy certificates accounted for 6.4% of the certificates issued in 2021.

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The top 15% of the building stock showed a steady improvement over the 2016–2019 sample, with the threshold for entering the top 15% being 118 kWh/m2a primary energy demand over the four years, and buildings with lower energy demand could reasonably be considered to be in the top 15%. The database of the Lechner Knowledge Center on which the calculation is based is transaction-based, but no energy efficiency data is available for the total housing stock. Adding two more years to the previous results of the analysis, the overall stock continues to show a positive trend for the top 15% in terms of energy demand.

Based on the results, the primary energy demand of buildings in the top 15% showed a steady improvement between 2016 and 2020, but the 2021 values show a decline compared to the values in 2020 which was an outstanding year.

Compared to the previous 2016–2019 values, however, the 2016–2021 time series indicates a significantly better quality top 15%, resulting in a decrease in primary energy demand.

The average annual improvement in energy demand between 2016 and 2021 was 4.6 kWh/m2a, indicating an acceleration in the rate of improvement compared to the 4 kWh/m2a calculated between 2016 and 2019. The entry threshold for the top 15% is 113 kWh/m2a based on the 2016–2021 housing stock, an improvement of 5 kWh/m2a compared to the previous value of 118 kWh/m2a. During the 2016–2021 period, 20% of the total housing stock had been certified, mainly marketable properties. The sample is therefore skewed, as it is likely that the lowest quality properties do not have energy certification, which may result in the top 15% of the housing stock having higher energy demand than shown.

The Climate Bond Initiative (CBI), one of the most important green certification bodies, has a rating system that, like the Taxonomy Regulation, considers the top 15% of the building stock to be green. The relevant threshold was also set by the CBI in January 2021 for Hungary with the contribution of the MNB. The criteria for the top 15% of the Hungarian building stock to achieve climate neutrality by 2050 determined an energy efficiency improvement trajectory pathway. Based on this trajectory, an average annual improvement rate of 4 kWh/m2a is expected. The housing stock threshold exceeded the target, with a primary energy demand threshold of 113 kWh/m2a instead of 114 kWh/m2a for 2021.

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The lowest rating sufficient to reach the top 15% may differ in some regions, which may justify spatial differentiation when developing new regulations and subsidies. A good illustration of the situation is the variation between regions in the classification of the lowest energy quality properties to be included to reach the top 15%. It is mainly in the Northern Hungary and Northern Great Plain regions that the gap in terms of the energy efficiency of the housing stock is most severe, with even 32% of the DD class in the former being sufficient to reach the top 15%. In contrast, the best performing county is Pest County, where only 34% of the CC class is in the top 15%, followed by Budapest with 46%.

In the disclosures under Article 8 of the Taxonomy Regulation, credit institutions will soon be required to report on the proportion of green and non-green residential properties financed which will require a database of energy performance certificates for residential properties financed by these institutions. In addition to the disclosure requirements, institutions can also examine the carbon intensity of their real estate portfolio

We still have a long way to go to reach our climate neutrality targets. To achieve and finance them, we need to rethink the financial and regulatory tools we have used so far and get as many actors as possible interested in acting in time.

The author is Renátó Ritter, an expert at the Department of Sustainable Finance of the MNB.

Cover photo: Getty Images

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