What would a letting agent fee ban mean for buy-to-let?

The number of UK landlords using letting agents has increased in the last six months, despite plans for letting agent fees to be banned, which would place further strain on buy-to-let investors.

New research from the National Landlords Association shows that the proportion of landlords in the UK who use a letting agent to manage their property has spiked since the end of last year. The NLA’s survey for the first quarter of 2017 found that six in 10 landlords now use a letting agent, up 7 per cent from the previous quarter.

The climb is something of a surprise, as the number of landlords using a letting agent has remained relatively consistent over the last few years, having only risen 1 per cent (from 53 per cent to 54 per cent) between 2014 and 2016. The research also shows the proportion of landlords who self-manage has decreased by nearly 10 per cent over the last year – falling from 46 per cent to 39.

The news comes as the recent changes to buy to let taxation are expected to increase the strain on landlords’ finances in the coming months.

“As landlords plan ahead to compensate for the tax changes over the next few years we would expect to see the number who use an agent to slowly fall away, and for more to start considering whether they are able to manage their properties themselves,” explains Richard Lambert, CEO at the NLA. “However, this sudden spike, which is completely out of step with recent trends, completely turns this theory on its head.”

Richard Price, Executive Director at UKALA, suggests that the key factor behind the rise could be the steady hand provided by agents during a time of uncertainty for the buy-to-let sector.

Indeed, many single property landlords are now realising that they may be pushed into a higher tax bracket, following the introduction of the new taxation rules, which are gradually phasing out mortgage interest tax relief for buy-to-let investors. By the time the changes are fully implemented in 2021, landlords’ mortgage finance costs will count towards their taxable profit. The current average annual mortgage finance costs for a single property landlord is £5,600. This means that those currently earning just below the upper limit of the basic income tax threshold of £45,000 could be pushed into the higher bracket of 40 per cent, and therefore exposed to significantly more tax costs.

16 per cent of landlords with a single property now say the changes will push them up a bracket, up from 9 per cent at the end of 2016. Single property landlords are the most prolific kind, making up around 1.5 million of the estimated 2.3 million landlords. To make ends meet, NLA research suggests that they would need to increase their rent by more than 11 per cent. As a result, the size of the private rented sector could well shrink in coming years, as more landlords consider selling up and exiting the sector than new investors buying into it. Analysis of members’ property transactions by the NLA shows that net growth (property purchases minus sales) has fallen by 63 per cent since George Osborne announced the withdrawal of mortgage interest relief in July 2015.

The letting agent fee ban is expected to exacerbate this trend further: in March 2017, when the letting agent fees ban was announced, the number of landlords selling up rose from three to four for the first time since November 2016. It remained at that level in April. With all three main political parties in the UK’s general election on 8th June promising to scrap letting agent fees for tenants, how would the ban impact the buy-to-let market in each region of the country?

We map the raw data from the NLA to highlight the areas where buy-to-let investors are most using letting agents, which would therefore be hardest hit by the new rules, as agents pass tenants costs on to landlords.

The result reveals that more landlords in the North East use an agent compared to any other English region. In the North West, where there has been a five per cent decrease since the end of 2016, landlords are the least reliant on agents, at 56 per cent. Buy-to-let investors are increasingly turning to both regions in search of strong yields, due to more affordable house prices and strong economic growth than the previously dominant hotspots of London and its surrounding areas. With the North West’s low reliance upon letting agents, however, cities such as Liverpool should be less affected by the proposed ban on fees than their North East cousins, such as Newcastle.

In the regions of outer London, the South West, and Wales, meanwhile, there have been significant increases in reliance upon letting agents from landlords.

The research arrives just as the UK government holds a consultation on the issue, with investors members of the industry and the general public able to respond and explain why they believe a ban on fees would be bad for the buy-to-let sector and, ultimately, tenants. The deadline for responses is Friday 2nd June.

Read How to beat the buy-to-let tax changes