The Queen's Speech confirmed that the government intends to ban letting agent fees charged to tenants.
A draft bill will be published later this year, with the policy likely to be in force shortly after.
While organisations such as Shelter, the housing charity, have endorsed the policy, others have raised concerns. For example, the Association of Residential Letting Agents (ARLA) has warned that fees will be passed on to landlords. These will in turn be passed back on to tenants in the form of higher rents, so the argument goes.
At the Social Market Foundation, we believe that a ban on letting agent fees for tenants should be welcomed. In fact, the overwhelming majority of tenants are likely to be better off as a result of the measure, which will create a more dynamic, transparent and competitive letting agency sector.
The fees that tenants currently face are simply too high. Median letting agent fees increased by 60 per cent in the five years after 2009 – far in excess of general inflation.
Critically, fees seem greatly detached from the costs which they are meant to be covering – online credit checks are low cost and a standard lease contract can easily be printed off. Ultimately, fees are probably being marked up by some agents as they know prospective tenants, desperate for a home, lack the bargaining power to argue.
Landlords have much more bargaining power than tenants and are likely to rebuff excessive fees if letting agents try to shove these onto them. They can always take their business elsewhere and letting agents will be reluctant to upset them with significant fee increases. This is why any rent rises will be very modest.
A Capital Economics report, commissioned by ARLA, found that a minority of landlords (41 per cent) expect they will need to pass fee increases on to new tenants, and the research finds they will “most plausibly” push rents up by £103 on average per year. Across all landlords, this suggests an average increase in rents of £42 per year (41 per cent of £103) – just 81p per week.
Given that average tenure in private rented accommodation is about a year and a half, even if rents increased by £42 per year, the average tenant would be over £200 better off at the end of an 18 month period.
Indeed, only those staying in a property for more than six years would be worse off on average (as higher rents would exceed the initial saving on tenancy fees). Most renters stay in a property for far less time than this and would be better off as a result of a fee ban.
Overall, the existing evidence suggests a fee ban should create a fairer and more competitive private rental market which levels out the uneven bargaining power between tenants, landlords and letting agents. I believe that is much better than a status quo where there are few competitive pressures to reduce these charges.