When renting a property in England, tenants are often required to pay upfront fees directly to the letting agents. These fees are supposed to cover costs which rarely amount to much more than simple admin tasks such as running credit checks, contacting references, or producing an inventory. The costs of this can vary wildly from less than £100 to over £500, with some reports suggesting fees can be higher than £1000.

This wild variation in costs is an indicator of a market failure. That one agency can charge £250 to contact a reference but another can charge £25, or that an agency is able to charge £100 for a ‘pet consent fee’, which appears to be nothing more than a punishment for saying you have a cat, indicates that tenants simply do not have the power to shop around, and agencies are not truly competing on price for potential tenants. Tenants choose between properties, they don’t choose between agencies.

If you’ve ever rented a house in a big city you’ll understand why this is. Properties can be few and far between, and are often snapped up within days, if not hours of going on the market. Once you find a suitably sized property in a suitable location, within your budget, and with walls that aren’t covered in damp, you often have little choice but to sign on the dotted line as soon as possible. Which letting agency the property is being advertised through makes little difference to your decision, there is simply not enough choice for you to turn down a suitable property because of the agency who happen to be advertising it. This means agencies are able to charge effectively what they wish in agency fees and tenants often have no choice but to pay.

Currently, as well as tenants paying fees to letting agents, landlords also pay fees to the agency. The main argument against banning fees on tenants seems to be that the agency will have to pass these costs on in full to the landlord, who will then pass that cost back to the tenant in the form of higher rent. While I don’t think that will be the case, and we’ll come on to that later, consider for a moment that the full cost of the fees is passed onto the landlord who then passes it onto the tenant in the form of high rents.

If there is an apartment on the market for £800/month with upfront agency fees to the tenant of £400, banning those fees would, in the worst case scenario, mean that the landlord would be charged £400 extra, and would cover that cost by raising the rent by £33 a month over the course of a 12 month tenancy. This would mean the tenant would end up paying £833/month instead, but with no upfront fees.

Even in this scenario, the tenant seems to benefit. Considering that moving house can be expensive already, with having to purchase new bits of furniture, hire movers etc., an additional £400 upfront can be a crippling cost. Most tenants would much rather spread that cost over the course of 12 months than have to pay it all upfront. So the idea that landlords will simply pass the cost across to the tenants doesn’t seem to be a strong argument against banning the fees.

However, it seems highly unlikely that landlords will end up having to pay the full cost of the current tenant fees anyway. Landlords, unlike tenants, do have the ability to shop around, and are able to take their property elsewhere if the fees are deemed to be unreasonable. If an agency tells a tenant they’re going to charge them £250 to run a reference check, the tenant often has no choice but to accept. If an agency tells a landlord they’re going to charge them £250 to run a reference check, the landlord can reasonably tell them that’s an extortionate price and instead go next door to the agency charging £50.

So, those agencies which are charging extortionate fees currently, either because they’re making massive profits or, much likelier, because they are hugely inefficient businesses, will be forced to cut costs through efficiency savings or go out of business as landlords will go elsewhere.

This is the market in action. At the moment, agencies can stay in business while being hugely inefficient and with no incentive to innovate, because tenants are a captive market who don’t have the power to shop around. Forcing agencies to actually compete on price will lead to lower overall prices, and create proper incentives for increased efficiency and innovation in the market.

And this is not just theory. In Scotland, where fees were banned in 2012, Shelter found there was little to no increase in rents following the ban.

And this is not the only benefit. Bans on fees will increase price transparency by providing a single advertised price to tenants rather than having two separate, often hard to identify prices (rent+ fees) being charged simultaneously. Providing better price information allows tenants to make better, more informed decisions and further increases the efficiency of the market.

Government intervention in the market is rarely a good thing, and should always be treated with suspicion. It is easy to understand an avid free-marketer opposing this ban on letting fees, but it is important not to be married to dogma. When there is clear evidence of market failure, and a clear case that intervention will increase the effectiveness of the market, all good free-marketers should support it. This is one of those cases.