Moaning estate agents are proof that the Chancellor did renters a favour by banning letting fees

The share prices of the UK’s largest listed estate agents slumped by between 5 and 15 per cent this week. This tells us that financial traders think these agents extract rent through excessive fees

Ben Chu
Sunday 27 November 2016 12:12
Comments
There's little option for renters to shop around unlike landlords, when it comes to choosing which estate agent to go with
There's little option for renters to shop around unlike landlords, when it comes to choosing which estate agent to go with

I had my own unpleasant experience with the suspiciously well-padded letting agent fee around a decade ago.

My partner and I were forced to move from our flat at short notice because the landlord, inconveniently for us, decided he’d like to live in the property himself.

Luckily, an identical flat on the floor directly above us, for the same monthly rent, came on to the market at around the same time.

So we seized on it, pleased at the prospect of our moving costs being virtually zero.

Also, happily, the letting agent employed by the upstairs landlord was the same as the one we had used when we’d moved into the current flat six months earlier – so we assumed our move would all be very straightforward.

That was a mistake. Imagine our surprise when the agent informed us that they would require us to hand over an extra £200 for another set of credit check references for each of us: exactly the same checks we had completed through the same agent only half a year earlier.

We pointed out to the agent that this seemed rather excessive given that our credit history was no different than it was six months ago.

We’d certainly paid all our rent on time over that period – which the agent knew very well because we’d paid it through them.

The answer came back that, sadly, such checks were mandatory for each new tenancy. No getting around it.

So we could pay the fees or lose the new flat. We took the flat, feeling like we’d been held up by a species of pinstripe-suited highway robber.

But soon this kind of shake down will be forbidden.

The overall economic picture painted in the Autumn Statement last week might have been as attractive as a squat in a condemned tower block, but Philip Hammond lifted the hearts of renters when he announced that agents would no longer be able to charge upfront fees to tenants.

Yet should they have been rejoicing?

Agents screamed that the consequence of this “draconian measure” would inevitably be an increase in rents for “the very people the government intends on helping”.

Their logic was that the costs of the credit checks and other absolutely necessary bits of administration would be forced on to landlords rather than tenants – and that the consequence would be that landlords would raise rents to compensate, hitting tenants in the pockets by a different route.

Even the housing minister, Gavin Barwell, seemed to subscribe to this logic just a couple of months ago.

But why was Barwell wrong then? Why are the letting agents wrong now?

The answer is that the economic model they are using is overly simplistic.

It assumes perfect information and perfect competition.

It assumes that tenants, faced with rip-off fees to rent a property, will just say no; that they will go to other letting agents offering better terms; that there will be little or no profit in the fees for agents and banning them will merely move the cost elsewhere, like pushing down on a waterbed.

But what if tenants don’t know what other agents are charging because agents don’t advertise them in their shop windows, or on their websites?

What if a shortage of properties in a tight market means most tenants generally accept the demanded fees without resistance?

What if agents don’t try to undercut each other by offering lower fees?

In short, what if information and competition are incomplete in this market?

In that case there may be economic “rents” that can be extracted by the letting agents in the form of excessive fees that bear little relation to the actual costs of the services for which they are nominally levied and which instead become a source of profit in themselves.

Can we know for sure this rent extraction is happening?

No. But there are clues.

A glance at the share prices of the UK’s largest listed estate agents upon news of the Government’s ban is instructive. They slumped by between 5 and 15 per cent.

Share prices are supposed to reflect expected future profits. This tells us that financial traders think these agents extract rent through excessive fees.

And consider the fury of the agents themselves.

Why the agitation?

If these fees were simply essential costs, as the agents claim, what difference would it make to them whether the final bill gets footed by the tenant or the landlord?

The only reason they have to fear is that landlords might have more information, options and general market power than tenants – and might not be so susceptible to being shaken down.

The lamentations of the pinstriped highway robbers are the best evidence the Chancellor really did do renters a favour last week.

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