Thursday, 8 May 2014

To Control Letting Fees or Not To Control Letting Fees ... Really Isn't the Question

The coalition has frequently trumpeted their “help to buy” policy where the government guarantees the mortgage of someone buying a new home.  Some fairly basic economic analysis will show you that all it really does is to push up prices and benefit the people who already own homes.  See my analysis here.  Now Labour have proposed some housing market reforms, claiming that they will help Generation Rent, but some relatively simple analysis shows that once again, this will only help home owners, in this case landlords.

The policy in question involves banning letting agent fees.  First of all, let’s look at the scale of the problem.  When renewing a lease (and maybe changing one or two terms in it), or getting a new lease, estate agents will charge the tenants for things like changing the contract, or credit reference agency checks.  Labour’s research (reported here) suggests that these fees average £902 across the country and £1,700 in London.  This may sound like a lot, but compared to the average cost of renting, is it?

Let’s take a somewhat unscientific approach to gauge the scale of this problem by looking at the rental prices of some 3 bedroom properties.  In order to do this, I am using Rightmove’s ability to look at properties on a map and selecting a property at random on the outskirts of a city.  On the outskirts here means just inside the Ring Road.  I’m not going to claim I have found the average rental price in these cities, but this will give us an idea

  • Oxford: This 3 bed semi costs £1,500 pcm, so fees would be 5% of annual rental cost. 
  • Bristol: This 3 bed flat costs £1,395 pcm, so fees would be 5% of annual rental cost.
  • Southampton: This 3 bed semi costs £925 pcm, so fees would be 8% of annual rental cost.
  • Manchester: This 3 bed house costs £1,495 pcm, so fees would be 5% of annual rental cost.
  • Birmingham: This 3 bed house costs £1,000 pcm, so fees would be 8% of annual rental cost.

Overall, based on a quick but unscientific survey, we are talking about fees representing between 5% and 8% of the rental cost outside of London.  In London, this 3 bed flat is available for £2,275 pcm, so the fees would represent 6% of the annual rental cost, this is within the range for the rest of the country.

This is small, but could be significant, but it is all rather beside the point anyway, because the policy will not save tenants anywhere any money whatsoever.  The reasoning, once again, is the fixed supply of housing which cannot increase at anything like the rate at which it needs to because of the UK’s planning regime.  Tenants have no reason to distinguish between money spent on housing in the form of estate agent fees or money spent on housing in the form of rent.  So if the estate agent fees go down, the money they are willing to spend on rent will just go up by exactly the same amount.  From the perspective of the landlords, the abolition of estate agent fees is just like an increase in the quantity of housing demanded at any given price.  But the planning regime means that the supply of housing barely responds to changes in the price of housing, so we can think of the supply curve as being virtually vertical.  

The  result is an increase in prices and tenants are no better off.  The real beneficiaries will be the landlords who will start to see higher rents.  So just like the coalition's "help to buy" policy, this policy, which as advertised as being on the side of Generation Rent, actually benefits those who already own homes, rather than the people it is supposed to be helping.  Still at least this policy transfers resources from estate agents to home owners, rather than help to buy, which transfers the resources from the people it is supposed to be helping.