Banning letting agency fees won’t solve our problems

Douglas Haig warns that costs would be passed back onto tenants from landlords if letting agency fees were abolished.

Over the last four years the Private Rented Sector (PRS) has seen dramatic changes, and will continue to do so over the coming years. The PRS in Wales must answer to two governments, here in Wales where we have had the Housing (Wales) Act 2014 and the Renting Homes (Wales) Act 2015, and in Westminster where we have had Stamp Duty changes (soon to be devolved), Mortgage Interest Tax changes and more stringent lending requirements imposed from the Bank of England. The PRS is, so far, withstanding the weight of recent legislation and taxation changes whilst continuing to improve quality and service standards, tenancy length with negligible change in rents – but only just.

Wales is currently following a similar legislative path as Scotland whose landlords have also had to cope with the two-government phenomena.  Both Wales and Scotland have introduced mandatory registration and Scotland is ahead in the implementation of standardised contracts as these will be coming to Wales under the Renting Homes Act.  However, Wales has not yet gone as far as to ban letting agent fees paid by tenants.

As such we have a unique opportunity to consider what might be the future of the PRS in Wales if we continue to push for these changes, by looking at our cousins in Scotland.

Scotland banned fees in 2012 after a clarification to a law that had existed since 1984. Since 2012 rents in Scotland have increased dramatically, 5% according to the ONS, and has produced a number of headlines exclaiming that rents In Scotland are at an “all time high”. Many people point out that the increase cannot be attributed specifically to the banning of fees due to a lack of evidence specially connecting the two, however absence of evidence is not evidence of absence and there is a strong correlation between the two.  It is also worth pointing out that many agents in Scotland were already not charging fees because it was already illegal, therefore the impact was hugely reduced from its potential.  Meanwhile over the same period rents in Wales have been below or around CPI, and in some years even reducing. This is good news for renters in Wales and something we want to see continue, but when a mountain of legislation is placed on the backs of landlords, and a series of taxation changes to take away any support, landlords may not be able to carry the weight any longer.

We have long warned that fees will ultimately be passed on from agent to landlord, and this cost base will put another pressure on the market. It seems that whatever the cause of the increase in rents in Scotland, this warning has come to fruition.

What’s worse is that Scotland has transferred the cost of agency fees onto those residents who have been in their properties long term. At present, the agency fee is a one-off cost, it’s a cost on transaction. However, if this cost is spread into rents as a result of this market pressure rather than an upfront transaction fee, that cost will be paid month after month, year after year, not just by those that move, but everyone.  Therefore long term residents will end up paying more than they ever would under the current system because they are covering the costs of those that move often.

A banning of these fees would also reduce the service that agents supply to both landlords and tenants.  At a time when we are looking to improve service we can’t be putting pressure the other way.  Agents will also look more and more to accept the ‘easiest’ applicant to reduce costs.  If someone can come to them with full applications ready to go then they are more likely to accept them over someone that is struggling to provide full references.  Ultimately this will impact the most vulnerable in society the worst.

The change in England may well not affect landlords in the same way the policy would in Wales. England has not introduced the equivalent of the Housing (Wales) Act 2014 which requires national registration, training and licensing, nor has England introduced standardised contracts with a Fit for Human Habituation requirement.  However, if Wales follows the same path as Scotland, we cannot be surprised when we have the same result or quite probably worse.

The situation is far more nuanced and complex than it may first appear, and a long-term solution to the extortionate fees charged by some agents is entirely possible if we are willing to explore the arguments and alternatives. Placing a ban on fees is simple, it’s easy to understand and not difficult to explain. However, it won’t solve our problems, but create bigger ones later when rents inevitably increase.  We ask that Welsh Government listen to alternatives and work with the sector as opposed to simply copying England.

Douglas Haig is Vice-Chairman and Director for Wales of the Residential Landlords Association

2 thoughts on “Banning letting agency fees won’t solve our problems

  1. Sadly this article is in my opinion all too prefictable. The central feature of the author’s case is that transaction costs will still be incurred and to recoup them the result will be higher rents. There are two central features of the current arrangements. The fees charged by agents are at best opaque. In my abeit limited experience of the sector there is
    no obvious relationship between fee structures, their level and the true economic cost of the work conducted to complete the transaction. For instance all the evidence points to the conclusion that legal documentation is in standard format that does not require any significant modification. Standard tenant agreements are available on the internet for as little as £25. My stong suspicion is that many agents do not possess the type of management accounting systems that allow them to have an accuate knowledge of each individual transaction. This provides ample opportunity for agents to game the process to their advantage.

    Furthermore it is questionable whether it is appropriate for tenants to pay for agent’s services that are a legitimate aspect of the relationship between landlords and their agents. Agents have developed a role for themselves as intermediaries. On the surface it appears they act as classic rentiers by extracting revenue that at best bears an approximation to costs. If one good thing comes of these proposals it might result in pressure for more transparency.

  2. A response to Mr James Douglas, sorry, Douglas Haig.

    Mr Haig is rightly concerned over plans to abolish agency fees in wales for tenants.
    Unfortunately, Mr Douglas concern is not generated from his position as a landlord, or as his position in the RLA (the industry body representing landlords), or somewhat more laughably, his concern for tenants.

    Indeed, those who have the most to lose from the banning of agency fees are not landlords, but the agencies themselves. Note how shares in Foxtons, a large letting agency firm, plunged by 14% 24 hours after the autumn statement in which Phillip Hammond announced his ban, meanwhile shares in companies which specialise in owning rental property remained buoyant.

    Further below, I will deconstruct every argument Mr Haig Makes, however firstly, I would like to make it clear I am disappointed in both the IWA and Mr Haig in their failure to announce a clear conflict of interest, as Mr Haig happens to own a reasonably large Lettings and estates agent in Cardiff, James Douglas, as well as being the director of another property management firm.

    I would have thought the IWA would have been more diligent in allowing such a conflict of interest to go unannounced, allowing Mr Haig to write as if his sole concern is that of landlords as the director and vice chair of the Wales RLA

    Arguments deconstructed.

    Mr Haigs arguments against banning agency fees are threefold.

    Claim 1) That fees will be passed onto tenants through higher rents, and this is bad for some, unspecified reason. Additionally this is specially unfair, as long term renters will see additional rent not in relation to the cost of their contract.
    Claim 2) That the level of service will decrease
    Claim 3) That those likely to fail referencing will be more vulnerable
    Claim 4) Wales has lots more regulation already burdening landlords, who simply can’t cope with more.

    In full disclosure, I am a passionate campaigner for social justice, the banning of fees, and I have previous experience as a letting agent for over a year, and an economics graduate from Cardiff.

    Fees will be passed onto tenants in the form of higher rent

    Establishing the link between banning fees and higher rents. Luckily, as Mr Haig points out, independent research has already taken place attempting to see the impact of banning fees on rents, Establishing no link between the two.

    Mr Haig goes on to dismiss this research, as he so eloquently points out

    ‘the absence of evidence is not the evidence of absence’

    Lo, behold, the axiom of economic analysis, to come from the least likely of all places – the reckoning of an estate agent. Unfortunately Mr Haig’s reckoning runs contrary to the principles of any economic analysis. When independent analysis finds no link between two factors, oddly enough, we tend to think that there is no link. Yet we are persuaded to abandon reason and logic in pursuit of Mr Haig’s intuitive reckoning. Basing policy on the reckoning of those who with vested interests does not, at least to me, seem an effective policy making decision process.

    You can see the analysis carefully laid out here (

    A breakdown of the independent analysis shows 1-2% of the 5% rise in rents during 2013 was unaccounted for within their regression model. They could not conclusively say what or which factors caused the 1-2%. As such, Qualitative research was used to ascertain the degree of impact of the ban on that 1-2% rise.

    The qualitative evidence suggests that the ban had a negligible impact on the 1-2% rent increase. This is owing to the fact 70% of Landlords who used agencies noted no fee increase, with the only 1 in 120 landlords passing the full cost of the increase on to the tenants in higher rent. It is not simply the absence of a link.

    Why don’t the transmission mechanisms by which Mr Haig believes fees will be passed in full onto tenants work in practice?

    Mr Haig (knowingly) ignores the market dynamic in which Agencies operate. The competition between agencies for landlords greatly exceeds the competition between agencies for tenants. If you don’t believe the independent analysis above, then ring 5 agencies, claiming you have 3 properties you want them to rent on your behalf. Wait a week, and see how times you are contacted with lower fee offers. Do the same with a property you wish to rent, you will be lucky if you’re re-contacted at all, let alone with a lower offer.

    When the housing market has a shortage of rental properties, agencies essentially capture some of the monopoly power that landlords have, and use it to exploit tenants by charging them fees. It’s this exploitation which allows agents to charge fees which have no relation to costs, and to make abnormally high profits. There’s a reason why estate agents have the highest Earnings to education level ratio of any mainstream profession.

    Even if all the independent analysis is wrong. Even if we ignore how the market works in reality, and instead we live in Haig world, where the entire fee is passed onto tenants. So what?

    It’s more beneficial to have the payment spread over several months of payments via a landlord than one upfront cost?
    – Tenants have less access to liquidity than those who have assets (like a house)
    – Tenants can more easily compare the whole rental market across different agencies, making the market more competitive and empowering tenants over agencies
    – Tenants have more power to negotiate the terms of a contract. Agencies fees are often non-refundable, and are taken before a contract is signed.
    – The VAT on the charge is refundable for some property owners, whilst Tenants can’t claim any VAT back.
    So, the overwhelming majority of the fee does not get passed onto the tenant into the form of higher rent. Even if, by some small chance, it still leads to a more beneficial outcome for tenants.

    This leads me onto the breakdown of the novel claim long term tenants are likely to see higher rents than they would otherwise.

    Note how this is just an assertion. No evidence has been collated for this statement of fact. If we return to Haig land (I’m sorry, I can’t promise it’s our last return journey), and we (wrongly) assume the entire fee is passed onto tenants in the form of higher rent, it is not made clear why the landlord is unable to divide the fee between a larger number (say, 36 months), than it is for a shorter one (say, 12 months). Maybe landlords in Haig land are especially numerically inept.
    Reduced service levels

    Again, we’re not given any evidence this might happen, it’s another assertion. Landlords using Mr Haig’s services may be dismayed by his plans to offer reduced to service to either them or potential tenants. If they are, maybe they should consider offering their properties to other agents. Because this is exactly how the market works.
    Agencies aren’t suddenly going to start swearing at potential customers and closing early – Landlords want their properties let in a timely and professional fashion. Whilst it’s true profit margins for agents will fall, there’s no evidence to establish the fall in profits (especially when the profits were derived from revenue which did not relate to cost) will relate to a fall in service provision.

    Interestingly, his assertion customer service levels will fall is inconsistent with ‘Hague land’ theory – if agents simply passed the entire cost onto landlords, there would be no change in the profits, and therefore no reason to fear changes in service level. Not only are his first and second claims false, they’re mutually exclusive!

    Thirdly, we’re presented with the concept that in Haig land, that for some-reason, the pressure to accept the easiest applicant will increase, making the vulnerable worse off. The insight he gives is persuading, but not as a description of what may happen, but what already happens.

    We are given no reason as to why a profit seeking agent does not already do this, or why pressure will increase as a consequence of banning fees.

    And finally, we have an assertion that Landlords are already over burdened with regulation. I happen to agree with Mr Haig in his belief. I do not however see this as a convincing argument, mainly because this doesn’t add to the regulatory burdens of landlords, merely at most, a simple re-calculation cost.

    I hope this review of Mr Haig’s interesting thoughts shines an alternative and Bright light on the issue,

    Kind Regards,

    Matt Procter.

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