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More costs for landlords as lettings fees banned?

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The government has relatively recently announced that letting agents will no longer be allowed to charge fees to tenants.

This has caused widespread concern amongst landlords, who fear that the additional costs they’ll incur will either damage the viability of their business or force them to pass the charges on indirectly through higher rents.

The background

Nobody should have been surprised because it was clear that ‘trouble’ in this area had been brewing for some time.

Letting agents’ fees have long been the subject of discontent for tenants because in many cases, the sums charged appeared to be out of all proportion to the services the tenants were receiving from the agents. Although there were huge variations from one agent to another, objective observers have described some of the up-front charges to tenants as being “extortionate”.

These charges were often also widely unpopular with landlords. The logic there was simple – they were already paying significant sums of money to the letting companies for their services and were being blamed by association in media and government circles for the letting agents’ charges to tenants.

Into this mixing bowl went several other catalysts:

  • widespread political discomfort/embarrassment at the housing shortage figures;
  • rapidly rising rents in some major cities which are approaching unaffordable status for many even financially comfortable people;
  • the media’s ongoing and traditional suspicion of landlords;
  • a political need for some populist policies at a time of uncertainty.

All the ingredients were there for the Chancellor’s autumn statement making letting fees a matter for landlords rather than tenants. There should have been no surprise because this move had already been adopted in Scotland and been shown to be both feasible and in terms of public perception, popular.

The landlords can ‘take it’

A series of measures over the past two years, notably the abolition of tax relief on buy-to-let mortgage payments, have constantly pushed up the typical landlord’s cost base.  To put it bluntly, many are now under ever higher pressure.

Once again, the cultural perception that landlords are all somehow exploiting people and making vast profits in the process seems to be ongoing. It’s accompanied by the hard to understand view in many circles that costs can be piled onto landlords and simply absorbed.

In reality, what is overlooked is that a landlord’s business is no different, in terms of its basic operating principles, to any other. It needs to have income that exceeds its costs, so as to generate a profit. That profit provides both a living income for the business owner and a platform for ongoing investment and growth.

So, as a matter of the basic economics of business life, if additional costs are passed onto landlords from letting agents, they will need to be recovered from somewhere. Given the pressure many landlords are under, that source is highly unlikely to be their own profit margins but instead the rent levels charged to tenants.

At face value, this measure runs the risk of pushing up rents and that could be a political issue again.

Landlords respond

It’s always dangerous to generalise about how landlords feel but at least some have both listened to the government and also looked at the experience of the Scottish rental market.

In the case of the government, there is a point being made that landlords can choose which letting agent they use whereas tenants can’t. That’s factually correct and the government believes that if landlords shop around more, including being far more selective about the agency costs accepted, then natural competition between the agencies will bring prices down.

Perhaps!

There is however some encouragement from Scotland. When this change was enacted there, there were widespread predictions of a rise in rent levels but in reality, such increases were small and short-term. They soon smoothed out.

What does the future hold as a result of this change?

It’s hard to say.  What is likely though is that landlords will be looking more closely at the letting agents they use and just how much they’re willing to pay for their services. Whether that proves to be in the long-term interests of tenants is yet to be seen.

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