The downconverted clip looked fine to me.
The MPEG2 encode suffered from bitrate starvation (macroblocking) around the bottom of the door; I think there is just too much detail in the image (that's an impressive camera, BTW). Tried my own encode using CCE at 6Mbps and got similar resutls to HCEnc, 8Mbps was slightly better but not much.
It would help if you could point out the exact part of the image you see this "flickering".