What to do about letting agents...

Yesterday I was asked a surprisingly difficult question. I was asked what I thought of charities and local authorities setting up "ethical" letting agencies. The fact is I haven't given huge amounts of thought to it - though our office is maintaining a watching brief on their activities and seeing what can be learnt.

So I had to retreat to an instinctive (and unpopular) no. It seems inconceivably that the state or non-profit sector could or should compete in this space cost effectively. We're glad they do so as they are a rare respite for people who are routinely exploited, but on being scrutinised on the issue, I just couldn't see how they could be scaled to have a beneficial impact for millions of people.

I have had a think now, and while I did so fully prepared to explain why I had been wrong and have changed my mind, I haven't. I really don't think such projects are a solution to the letting agency problem. But as a representative of a tenant advocacy group, this does bear some explaining.

As middle-men and women in a market, lettings agents are not actors in the market. They can choose to operate their businesses ethically or parasitically or somewhere in between. They add a transaction cost to landlords and tenants, but they don't increase or decrease supply or demand. Different letting agents do operate to different personal codes, some around who you charge and how much, and some have limits on the psychological sales techniques they are willing to apply. But there is broadly no regulation of the sector.

From a tenant perspective, they don't look for an agent, they look for a home, and in any case the agent acts for the Landlord, not the tenant.

As a tenant I am likely to pay lots of fees, sometimes (and by law) these fees are transparent. Often they are not regardless of the law, which is patchily enforced.

Even within the law hidden fees can sneak in and tenants can pay exorbitant fees on unnecessary tenancy renewals and tenancy check outs. The scale of the fees charged is also an issue. Checking an inventory at the end of a tenancy is often charged at over a hundred pounds, ridiculous charges are levied for renewing a tenancy or changing a housemate in the case of a shared house. Even credit checking fees bear no relation to he cost of the work involved. Even the bald faced "agency fee" that tenants are often confronted with has moved from being a fixed sum to, increasingly, being a percentage of a month's rent, meaning agents can benefit from rising property values outstripping inflation in the costs of running their business.

There is growing anger among letting agents about the reputation they bear because of the rapacious actions of a full half of the people in their profession. These are decent people doing a hard day's work for a fair wage, but embarrassed to tell strangers what they do for a living because of the unending stream of horrific anecdotes about the parasites who have the same job title.

If you think about the market dynamics at play, the more tight the supply of housing gets in relation to demand, the higher are the charges that agents can get away with charging to tenants, even though the agent is not creating any of the supply or the demand. They are benefiting from the market dynamics without contributing to them.

The dynamic that ought to be at play should be between the landlord and the letting agent. The landlord should choose an agent by balancing the cost against the quality of the service they receive, which is not a radical expectation of a market. However, an agent who charges no tenant fees, or one who charges them at a reasonable rate and transparently, will be easily undercut by another, more rapacious agent. They can offer a reduced fee to landlords in the knowledge that their tenant fees will make up their shortfall.

And it's not just tenant fees. There is a suggestion that high volume agents can secure fees and discounts from deposit protection schemes that never find their way back to the landlord, who is the ultimate customer for deposit protection. I'm not suggesting that there's anything wrong with selling something for more than you bought it, but these agency "kick-backs" raise the overall cost of deposit protection to landlords, which is passed on to tenants, without adding any value from the agent's involvement.

Perhaps more insidious is the growing relationship between agents and inventory checking services. I don't have non-anecdotal evidence that money flows from preferred inventory checkers letting agents, but their fees are often extortionate, hidden in contracts under the words "reasonable" and "independent", and the tenant paying for the service has no choice over who provides the service and at what cost.

This broadly sums up what we would call the letting agent problem, and we certainly see the attractiveness of philanthropic and council run agencies that seek to disrupt this behaviour.

But our concern is that these entrants undercut the good agents more than they do the parasitical ones. I spoke to a large agent recently who insists that all tenant fees are detailed on a business card that is handed to tenants as soon as they walk in the door. He loses business to other agents who hide their fees until a tenant is committed to a home - but he would also lose business to a philanthropic agency that doesn't charge tenants at all. He would perhaps lose more business because the parasitical agent is hiding fees.

Another agent I have been in contact with is very proud that he doesn't charge tenants fees at all. But he too is potentially undercut by a philanthropic or tax funded entrant on the landlord fee side. And don't forget, he's already charging higher fees to landlords than those other agents.

So it is clear that any individual who has access to a home through a philanthropic agent is personally better off, and this is not to be derided for those often vulnerable people who do have such access. However, the market impact is to drive out of business those agents who already act in some manner ethically.

This is a displacement dynamic that you can visualise as though it's a liquid. If you have a litre jug representing the total quantity of new tenancies and a litre of water representing the total activity of agents, inserting a small brick would have the effect of reducing the total remaining agent activity, the equivalent of inserting an advantageously funded philanthropic agent. The insertion is at the base of the jug but the loss activity, water overflowing the jug, happens at the top.

Perhaps I shouldn't take this metaphor to far so there's another way of thinking about it. The agents who will go out of business are the ones who are making less profit. The agents who make less profit are the ones who hold back from the excesses of their peers. This displacement means a small number of people get access to a better agent and a similar number of people are consigned to a worse one than they would otherwise have been able to find.

But funders of philanthropic agencies do have an opportunity to counter this argument. It would make sense to pursue this approach if it were your explicit aim to put out of business almost every private sector agent in a market. In the UK that would mean scaling up to handle over 1.5 million new tenancies a year, or it could be approached on a city or region basis.

My concern is that this is not the approach being taken and I don't see the well intentioned Councils and funders have either the appetite or the money to create a new, billion pound business. And even if they had both the desire and the funds, there are cheaper ways to solve the problem.

And this is how.

  1. Ban all agents' fees to tenants
  2. Give tenants the right to choose which deposit scheme their deposit is held in, effectively ending the agency kickback.
  3. Give tenants the right to find their own, independent inventory checking service, again ending the agency kickback.

Just these three simple reforms would vest the overwhelming bulk of agency revenue into landlord fees, shifting the agency market (with landlords) from non-functioning to functional. It would create a level playing field between decent agents and dodgy ones, creating a dynamic where the parasitical agents go out of business first, not the good ones, through the power of effective market competition.

This is really not to say that philanthropic agencies don't help anyone, the truly do. But they do so in a similar way to the Help to Buy scheme. The direct beneficiary is helped but it is at the expense of everyone else. These agencies should exist and their niche should be to focus support on the most vulnerable tenants, but you have to make that decision while mindful of the impact on others.

But if councils and funders do have a billion pounds spare, it might be more effectively spent building some permanently affordable homes and we would direct them to our affordable housing paper Buying out of the bubble as a place to start.

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