The ‘ban’ on Letting Fees to Tenants. Who is affected and how?

Our new Chancellor of the Exchequer, Phillip Hammond, dropped an ‘unexploded’ bombshell  in his first Autumn Statement on Wednesday 23rd November announcing that a ban on letting fees to tenants would be implemented “as soon as possible”

The private rental sector forms an important part of the local housing market and the engagement from the chancellor in Wednesday’s Autumn Statement is a welcome sign that it is recognised as such. I have long supported the regulation of lettings agents which will ensconce and cement best practice across the rental industry, and I believe that measures to improve the situation of tenants should be introduced in a way that supports the growing professionalism of the sector. Over the last few years, there has been an increasing number of regulations and legislation governing private renting and it is important that the role of qualified, well trained and regulated lettings agents is understood.

There is no doubt that this, as yet finalised, ban will affect the three main players in the rental sector; Tenants, Landlords and Agents.

The major headlines coming out of this seem to be:

All tenants fees are going to be passed onto landlords’  and  ‘The ban will not mean an increase rents that tenants have to pay’.

Nonsense on both fronts…

Shelter and Rent Increases

Scotland banned Letting Fees in 2012. The charity Shelter have been a big voice in persuading and lobbying the Government since it managed to persuade the Scottish Parliament to ban fees in 2012.

Whenever they get an opportunity on either television or radio, they keep talking about their Independent Research which backs up their argument that rents didn’t rise in Scotland as a result of the ban; which they say was published in 2014.

A researcher for Shelter in Scotland published these comments on 24th November 2016 – the day after the Autumn Statement.

“Renters, landlords and the industry as a whole had benefited from banning fees to renters in Scotland. It found that any negative side-effects of clarifying the ban on fees to renters in Scotland have been minimal for letting agencies, landlords and renters, and the sector remains healthy.”

“Many industry insiders had predicted that abolishing fees would impact on rents for tenants, but our research show that this hasn’t been the case. The evidence showed that landlords in Scotland were no more likely to have increased rents since 2012 than landlords elsewhere in the UK. It found that where rents had risen more in Scotland than in other comparable parts of the UK in 2013, it was explained by economic factors and not related to the clarification of the law on letting fees”

The report Shelter mentioned was published in December 2013  (only 12 months after the ban).

How can Shelter quote a report today, in late 2016, when that report they use as proof  that rents haven’t risen was published in December 2013, only 12 months  after the ban (and you think about it, these reports take a few months’ to compile), so the report was only based on figures, say, six to nine months after the ban came into action. The ban was imposed in the last quarter of 2012.

What really happened to rents in Scotland?

I have carried out my research up to the end of the third quarter of 2016, and that tells a different story.

In Scotland, rents have risen according the CityLets Index by 15.3% between 2012 and today (CityLets being the equivalent of Rightmove, North of the Border). When I compared the same time frame, using the Office of National Statistics figures for the English Regions between 2012 and 2016, this is what has happened to rents

  • North East 2.17% increase
  • North West 2.43% increase
  • Yorkshire and The Humber 3.21% increase
  • East Midlands 5.92% increase
  • West Midlands 5.52% increase
  • East of England 7.07% increase
  • South West 5.82% increase
  • South East 8.26% increase
  • London 10.55% increase

..and let me remind you of Scotland … 15.3% increase.

See the graph below ..

15094287_10154679132654590_4158838222615935824_n

Conclusion

Are you really telling me the Scottish economy has outstripped London’s over the last 4 years?

Are really telling me wages and the Scottish Economy have boomed to such an extent in Scotland in the last 4 years they are now the Powerhouse of the UK? If they had, Nicola Sturgeon would have driven down the A1 in blink of an eye, not even stopping at FerryBridge Service station for a Bacon Bap and Black Coffee to demand immediate Independence.

Rents will increase as the fees will be passed onto landlords in the coming years. Not immediately… but they will.

Good News for Tenants?

So, let’s look at tenants.. this is great news for tenants, isn’t it?  Well before all you tenants crack open the Prosecco, I think there are a couple of points to think about.

Although I can see prohibiting letting agent fees will be welcomed by tenants, at least in the short term, because they won’t realise that it will, eventually, rebound back on them.

Firstly, it will take around 12 and 18 months to ban fees if previous similar actions are to be compared. Consultation needs to take place, then it will take an Act of Parliament to implement the change the necessary laws.

A prohibition on agent fees may preclude tenants from receiving an invoice at the start of the tenancy, but the unescapable 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.

Published at the same time as the Autumn Statement, hidden in the Office for Budget Responsibility’s Economic and Fiscal Outlook on the Autumn Statement (The Office for Budget Responsibility being created by Government in 2010 to provide independent and authoritative analysis of the UK’s public finances), it said…

“The Government has also announced its intention to ban additional fees charged by private letting agents. Specific details about timing and implementation remain outstanding, so we have not adjusted our forecast. Nevertheless it is possible that a ban on fees would be passed through to higher private rents”.

So… Bad News for Landlords?

If the unescapable outcome will be an increase in the proportion of costs being met by the landlord, then surely, that’s bad news for landlords?

As a responsible letting agent, I have a duty to all my customers to provide a quality service to my customers. I also have a business to run.

It takes, according to ARLA, (Association of Residential Letting Agents) on average, 17 hours of work by a letting agent to get a tenant into a property. We need to complete a whole host of checks prescribed by the Government; including a Right to Rent check, Anti Money Laundering checks, Legionella Risk Assessments, Gas Safety checks, Smoke Alarm checks, Construction (Design & Management) Regulations 2007 checks,  compliance with the Landlord and Tenant Act, registering the deposit so the tenants deposit is safe and carry out references to ensure the tenant has been a good tenant in previous rental properties.

The vast majority lettings agents take these regulations very seriously and are expected to know them inside out; making us experts in our field. Yes, there are some awful agents who ruin the reputation for others, but isn’t that the case in most professions?

No landlord, tenant and letting agent does work for free.

I, along with every other Derby letting agent will have to consider passing some of that cost to my landlords in the future. Now of course, landlords would also be able to offset higher letting charges against tax, but I don’t want landlords out of pocket, even after the extra tax relief.

So what does this all mean for the future?

The current application fee for a single person at my lettings agency is £125 and for a couple, £250. On average, the fee is around £200 per property. Our average length of tenancy is around one year and eleven months, so let’s round that to two years.

That means £200 needs to found in additional fees to the landlord, on average, every two years.

In Actual Pound Notes

In 2005, the average rent of a property in our area was £524 per month and today it is £600 per month, a rise of only 14.5% against an inflation rate (RPI) of 38.5%).

Using an average management fee of 10%, this means the landlord will paying in £720 p.a in management fees. If the landlord is expected to cover the cost of that additional £200 every two years, rents will only need to rise by an additional 2% a year after 2018, on top of what they have annually grown by in the last 5 years.

Below is a graphical representation of how rents could change:

fees-graph

So, if rents did rise by an additional 2% a year after 2018, on top of what they have annually grown by in the last 5 years, average rents would rise to £709 per month by 2022  (see the red line on the graph) and so the landlord would pay £850 p.a. in management fees which would go towards covering the additional costs without having to raise the level of fees.

.. but that is bad news for Derby Tenants?

Quite the opposite. Look at the red line on the graph;

If the average rent had risen in line with inflation since 2005, that £524 per month would have risen to a today average of £726 per month. (Remember, the average today is only £600 per month) .. and even if inflation remains at 2% per year for the next six years, the average rent would be £789 per month by 2022 .. meaning even if landlords increase their rents to cover the costs – tenants are still much better off, when we compare to the £709 per month figure to the £789 per month figure.

Conclusion

The banning of letting fees to tenants could be good news for landlords, tenants and agents!

It removes the need for tenants to find lump sums of money when they move. That will mean tenants will have greater freedom to move home and still be better off in real terms compared to if rents had increased in line with inflation.

Landlords will happy as they yield and return will increase with greater rents whilst not paying significantly more in fees to their lettings agent.

Letting agents who used to charge fair application fees won’t be penalised as the rent rises will compensate them for any losses.

…and the agents that charge the really silly high application fees. .. well that’s their problem.

At least we know we will be able to offer the same, if not better service to both our landlords and tenants in the future in light of this announcement from Phillip Hammond. Although the detail has still to be consulted upon and agreed, on the face of it, the ban isn’t all bad news.

 

 

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