Letting agent fee ban will lead to higher rents, industry warns

The decision by the Chancellor of the Exchequer to ban letting agent’s fees in England and Wales could backfire and end up leading to rent rises, according to the industry.

Philip Hammond announced in his autumn statement that the ban will help 4.3 million households in private rental housing and stop them being hit by hundreds of pounds in upfront fees. There will be a period of consultation before the ban is introduced.

According to Citizens Advice these fees average £337, whilst housing charity Shelter’s research suggests that one in seven pay more than £500. However letting agent say the average is much lower at around £200.

However, according to the National Landlords Association (NLA) agents will simply pass on the fees they have been used to charging onto their landlords who, in the face of tax changes and extra stamp duty costs are just as likely to pass them on to tenants as higher rents.

‘The new Chancellor is clearly aware of the pressures facing those living in the private rented sector, but in attempting to improve affordability he has shown that, like his predecessor, he lacks an understanding of how the whole sector works,’ said Richard Lambert, NLA chief executive officer.

‘There’s no doubt that some unscrupulous agents have got away with excessive fees and double charging landlords and tenants for far too long. Banning letting agent fees will be welcomed by private tenants, at least in the short term, because they won’t realise that it will boomerang back on them,’ he explained.

‘Agents will have no other option than to shift the fees on to landlords, which many will argue is more appropriate, since the landlord employs the agent. But adding to landlords’ costs, on top of restricting their ability to deduct their business costs from their taxable income, will only push more towards increasing rents,’ he added.

Richard Price, executive director of the UK Association of Letting Agents (UKALA), also believes it will lead to higher rents in the private rented sector as the cost is passed on from agents to landlords to tenants.

‘Arbitrary bans sound appealing as a quick fix, but the problem of affordability in the private rented cannot be addressed by preventing legitimate businesses from charging for their services,’ he said.

‘A ban on agent fees may prevent tenants from receiving a bill at the start of the tenancy, but the unavoidable outcome will be an increase in the proportion of costs which will be met by landlords, which in turn will be passed on to tenants through higher rents,’ he pointed out.
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‘UKALA agents strive to provide a premium service which represents excellent value for money and this ban will place in jeopardy hundreds of professional businesses in order to deal with the few unscrupulous,’ he added.

David Cox, managing director of the Association of Residential Letting Agents (ARLA), described the move as ‘a draconian measure’ and said it will have a profoundly negative impact on the rental market.

‘It will be the fourth assault on the sector in just over a year, and do little to help cash poor renters save enough to get on the housing ladder. This decision is a crowd pleaser, which will not help renters in the long term. All of the implications need to be taken into account,’ he pointed out.

He also pointed out that most letting agents do not profit from fees with ARLA research showing that the average fee charged by ARLA licenced agents is £202 per tenant, which the industry regards as fair, reasonable and far from exploitative for the service tenants receive.

‘These costs enable agents to carry out various critical checks on tenants before letting a property. If fees are banned, these costs will be passed on to landlords, who will need to recoup the costs elsewhere, inevitably through higher rents. The banning of fees will end up hurting the most, the very people the government intends on helping the most,’ Cox added.

John Eastgate, sales and marketing director of OneSavings Bank, also believes the ban will not have the aim intended. ‘Letting fees have inflated beyond reason in certain parts of the country, so scrapping them has all the markings of a good policy. However, renters will inevitably pay for the further cost on landlords through increased rents, so it’s hard not to see the move as two steps forward, one step back for housing policy,’ he pointed out.

The decision is short sighted and is yet a further challenge to landlords who have faced a barrage of increased costs over recent months, according to Nick Leeming, chairman of Jackson-Stops & Staff.

While the ban on lettings fees still requires a Government consultation before it is implemented, he believes that its impact on the UK housing market could be far reaching with the firm seeing a consistent reduction in the number of landlords buying investment properties since April this year.

‘This means that fewer rental properties are now coming on to the market to serve the growing rental population. A better solution would have been to create a more competitive fee environment and ensuring that landlords are not further discouraged from the market,’ he said.

John Goodall, chief executive officer of peer to peer platform Landbay, pointed out that in Scotland fees were banned in 2012 and rents have been growing in Scotland faster than in other parts of the UK.

‘Landlords will have little choice but to absorb letting agent fees themselves and, in time, will pass these on to tenants. Rents are likely to rise faster than house prices over the next five years, so the overall outlook for tenants is still bleak,’ he said.

‘What would really help those just about managing to climb onto the property ladder, is a bold but realistic commitment to encourage the expansion of rental housing, which would help maintain affordable rents,’ he added.

The Royal Institution of Chartered Surveyors said that the Government needs to get the balance right. ‘It must strike the right balance between allowing credible, regulated letting agencies to recover reasonable costs and the unquestionable need to protect tenants from suffering excessive charges by less scrupulous agents,’ said head of UK policy Jeremy Blackburn.

Michelle Niziol, director of IMS Property Group, described the ban as unnecessary. ‘Affordability in the private rented sector is an issue related in some respect to the lack of affordable housing being built. There is no one size fits all solution to the issue and whilst as a regulated lettings agency we welcome and encourage improvement and regulation in the sector, today’s announcement by the Chancellor to ban the charging of tenant fees is unnecessary legislation that will inhibit rather than benefit tenants renting in the UK,’ she said.

‘We believe the sector must be competitively priced and hold obvious benefit for the landlord as well as the tenant. As little is known at this stage, we will need to review the legislation in full before we can determine the impact it will have on our business and ultimately our clients,’ she added.

Ben Madden, managing director of London estate and letting agents Thorgills, is concerned that fees will continue to exist disguised in another form. ‘The ban on letting agent fees is both myopic and misplaced. It’s also an embarrassing U-turn in Government policy,’ he said.

‘While letting agent fees need to be transparent and competitive, and usually are, they are a legitimate business cost and an integral part of the lettings process. Without thorough referencing, credit and inventory checks, landlords are sitting ducks and tenants can also lose out. These fees are about protecting both sides,’ he explained.

‘Scrapping these fees could result in unscrupulous agents delivering less, not more transparency. Instead of being visible and transparent, fees could be hidden and when people renew their tenancies, they could end up paying more again. For tenants, the ban will drive up costs rather than reduce them. As is often the case, the actual people a policy change is designed to help will be the ones who suffer the most,’ he added.