The Chancellor of the Exchequer has revealed a future ban on tenant fees in his first Autumn Statement, I discuss below what this means for SK8 tenants and landlords.
Great News for SK8 Tenants
Although I can see the end of letting agent fees being welcomed by SK8 tenants, at least in the short term, I'm certain there will be a rebound.
Firstly, it will take between 12 and 18 months to ban fees, as consultation followed by the journey to Law can take time.
A ban on agent fees may preclude tenants from receiving an invoice at the start of the tenancy, but the inescapable outcome will be an increase in the proportion of costs which will be met by landlords, which in turn will be passed onto 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, 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”
When Scotland banned the fees what happened?
Scotland banned Letting Fees in 2012. The charity Shelter have been the biggest advocates in persuading and lobbying the Government to bring the ban to the country. Their reasoning was;
“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”
.. yet the devil is in the detail….
Shelter were quoting this Research from December 2013 to say rents never went up following the tenant fee ban in Quarter four, 2012. However, this research was three years ago, only 12 months after the ban was put into place. If we look further at what has happened to rents in Scotland in 2014, 2015 and 2016 the story changes dramatically.
What really happened in Scotland to rents?
In Scotland, rents have risen, according the CityLets Index by 15.3% between Quarter 4, 2012 and today
(CityLets being the equivalent of Rightmove, North of the Border – so they know their onions and have plenty of comparable evidence to back up their numbers).
When I compared the same time frame, using Office of National Statistics figures for the English Regions between 2012 and 2016, in the North West it had only risen by 2.17%
Has the Scottish economy outstripped London’s over the last 4 years? Have Scottish wages and the Scottish Economy boomed to such an extent in the last 4 years they are now the Powerhouse of the UK? Or has the Scottish ban backfired to negatively impact the renter? And therefore will we see the same here when the Government's plans come to fruition?
So what will happen in the SK8 Rental Market in the Short term?
Well nothing will happen in the next 12 to 18 months .. it’s business as usual!
… and the long term?
Rents will increase as the fees tenants have previously paid will be passed onto Landlords in the coming few years. Not immediately...but they will.
As a responsible letting agent, I have a business to run. It takes, according to ARLA, (Association of Residential Letting Agents) on average 17 hours work by a letting agent to get a tenant into a property. However, this varies as most importantly, we need to find the right tenant. My rule of thumb is, would I trust this person to stay in my property?
Then 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, Affordability Checks, Credit Checks, Smoke Alarm checks, Construction (Design & Management) Regulations 2007 checks and compliance with the Landlord and Tenant Act. Finally registering the deposit so the tenants deposit is safe and carry out references to ensure the tenant has been a good tenant in previous rented properties.
All of which the vast majority of lettings agents take very seriously and are expected to know inside out, making us the 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?
I, along with every other SK8 letting agent will have to consider passing some of that cost onto my landlords in the future. Now of course, landlords would also be able to offset higher letting charges against tax, but I (as I am sure they) wouldn’t want them 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 £120 and for a couple £240 .. meaning on average, the fee is around £200 per property for the tenant.
I am part of a Group of 500+ Letting Agents, and recently we had to poll to find the average length of tenancy in our respective agencies. The Government says its 4 years, whilst we found the actual figure was nearer one year and eleven months, so let’s round that up 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 SK8 Property was £772 per month and today it is £873 per month; a rise of only 13.1% (against an inflation rate (RPI) of 38.5%).
Using the UK average management rates of 10%, this means the landlord will be paying £1047 per annum in management fees (exc VAT).
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.
So, if that were to happen in SK8, average rents would rise to £981 per month by 2022 (see the red line on the graph) and so the landlord would pay £1,177 per annum 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 SK8 Tenants?
Quite the opposite. Look at the blue line on the graph). If the average rent SK8 tenants pay had risen in line with inflation since 2005, that £772 per month would have risen today to an average of £1069 per month. (Remember, the average today is only £873 per month) .. and even if inflation remains at 2% per year for the next six years, the average rent would be £1162 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 £981 per month figure to the £1162 per month figure.
The banning of letting fees is 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 be happy as their yield and return will increase with greater rents whilst not paying significantly more in fees to their lettings agency. 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 charged the silly high application fees .. well that’s their problem. At least I know I can offer the same, if not a better service to both my landlords and tenants in the future in light of this announcement from Phillip Hammond.