What the ban on letting agency fees means for the marginalised

Much in need of some good publicity, Philip Hammond, the Chancellor, is set to announce a ban on letting agency fees.

These charges - often for administrative duties, such as inventory and background checks - are clearly unpopular. But in their efforts to find a political free lunch, the Conservatives should consider the threat the changes pose to the country’s most marginalised renters.

A landlord has little way of knowing whether a prospective tenant will be a delight, or a nuisance. It is this risk of the latter that means that landlords will keep rents low for long-term residents, knowing that they would prefer to keep the business of well-behaved occupants.

Letting fees, most of which are paid at the beginning of an occupancy, have served as one way to mitigate against the risk of a rotten tenant. If a new occupant is destructive, and must be evicted, the landlord is then more able to cover a loss of earnings while a new tenant is found.

Eliminating these charges could be to the detriment of tenants who landlords perceive to be more risky. Without letting fees, there is a concern that landlords could rely on crude race or class-based stereotyping in order to judge the riskiness of prospective tenants.

There is already evidence of discrimination in the British rental market, as well as in the US - a problem that a ban on letting fees could exacerbate. Yet despite this concern for at risk renters, the policy is likely to be a vote winner. 

Surveys confirm that the charges are not liked. Last year, Citizens Advice estimated that new private sector tenants were facing an average of £337 in letting fees. However, we cannot be sure that banning the fees will reduce the cost of renting. As the housing minister acknowledged just two months ago, landlords are likely to raise rents in order to recoup the lost revenues from a ban on fees.

Rather, the economic rationale for a ban on fees is likely to be that by eliminating upfront moving costs, would be tenants can more easily relocate, and rents can adjust more quickly.

This effect could plausibly be a boon to the UK’s labour market as well. Rising homeownership rates are associated with a subsequent increase in unemployment, perhaps because workers become less willing to move for work when the costs of moving home increase.

This could also ameliorate some of the concerns over tenant riskiness previously discussed.

If abolishing letting fees does increase rental sector liquidity, then kicking out an occupant is less likely to result in a property being left unoccupied - producing no rents - for a prolonged period. It is difficult to determine which effect - the lack of upfront revenues or an increase in tenant turnover - would be more significant.

However, reducing the transaction costs of moving could also play into the hands of landlords keen to evict tenants. As, again, the prospect of a property being left vacant becomes less of a concern.

US evidence suggests that such evictions tend to fall disproportionately on women and non-whites. Abandoning the letting fee model could make the position of these vulnerable tenants yet more precarious.

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