Renting in 2030 – Deposits

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Introducing a new series: Renting in 2030

I think
it’s safe to say that we are in the middle of a transformative episode for the
entire planet. In the same way that the fall of the Berlin Wall in 1989; or the
catastrophic events of September 11^th, 2001; or even the last
financial crises in 2007/8 were turning points in the way the human race
interacted as a species I think the spread of Covid-19 will been seen by
academics of the future as a period that changed the world.

Bringing things back closer to home, Covid-19 may also prove to be a significant milestone in the continued development of our residential private rental sector. I want to introduce you to my pilot blog in a new semi-regular series that will explore particular areas of our industry and speculate on some significant changes we could see. My role as Head of Redress at the Property Redress Scheme requires me to keep on top of the levels of service expected from our letting agents and therefore I regularly see a lot of the innovation throughout the lettings world. As ever, I will err on the side of optimism and look at where we can potentially improve as a market. I also want to avoid the topics currently in debate such as evictions and rent guarantee insurance as, if you’re like me, you’ve already seen a fair amount of coverage!

Can the deposit as we know it survive?

To begin I
want to dive into the world of deposits. Particularly following the ban of
tenant fees last year, the tenancy deposit is the largest lump sum a tenant
needs to gather in order to secure a new home. I must declare an interest in
this area of the market as the Property Redress Scheme is part of the Hamilton Fraser
Group who operate mydeposits, one of the three
government authorised protection schemes. Hamilton Fraser are also soon to be
launching a deposit replacement product through their latest brand Ome. However,
seeing this part of the lettings process up close gives me a unique position to
posit on the future of deposits.

Something
that I’ve really been impressed with during this spate of chaos is the
compassion many landlords are showing. Everywhere you look there are stories of
landlords offering rent reductions where they can or, in many other cases,
offering complete rent holidays. This is a direct response to the fears tenants
have over losing their homes by no fault of their own. Landlords have shown
that they are human too and not the greedy, opportunistic monsters that is
often portrayed by certain sections of the media. They have offered flexibility
to tenants that don’t have the room to budge. However landlords are, after all,
commercial entities and have their own bills to pay and mouths to feed. But I
don’t expect to see the end of this flexibility and instead we will see further
innovation in the deposit sector.

Now when you consider the average amount of savings per person in the UK is just £813 (and dropping) and 53 per cent of 22-29 year olds have no savings at all, it is clear that cash flow and emergency planning has passed many of us by – by choice or impossibility. Whether you are a home owner or a renter this poses a problem. As a society I believe we’ll start to be more prudent, saving more of what we have and keeping a small portion for a rainy day. This frugal nature is one we attribute with the generation that lived through trying times during World War Two and one I wouldn’t be surprised to see again. Our internal research at Hamilton Fraser, by deposit replacement provider Ome, shows the average deposit in England since the introduction of the tenant fee ban is £985 – quite a significant figure for the vast majority of people. This is also money that belongs to the nation’s renters but is not available to call upon in times of need. Deposits have been under increased scrutiny over the past year or so, with alternative products pushing traditional providers to innovate as well as the current government looking to introduce a new Lifetime Deposit – whatever that ends up looking like!

What could we expect to see?

I think the
important thing to remember is a deposit is a financial replacement for trust. A
landlord wants to know that they have a degree of financial redress available
should a tenant fail to abide by the terms of their tenancy. However, in
today’s increasingly cashless society the need to transfer the supervision of money
to the landlord, or agent, can pose more troublesome and risky.

Paired with
the continued push towards a tenant-focused lettings market I can see the
transfer of cash deposits to landlords and agents eradicated. I suspect, before
long, tenants will be given the responsibility to protect their own deposit and
provided with evidence to show their landlord they are ready to rent their
property. This will be a “custodial” only environment, where a cash deposit is
placed within an authorised deposit protection scheme directly by the tenant
and the money never touches the landlord. At the end of the tenancy, the
landlord will be given the opportunity to request a settlement figure which, if
required, would be adjudicated on by the scheme in the same way as we expect
now.

I think deposit replacements will also play a part in this new lettings world, where they substitute in for the current “insurance-backed” schemes. If the industry pans out how I predict, there will be no need for schemes that allow landlords to hold the deposit themselves, albeit with protection for the tenant to reclaim it if need be. Instead, tenants that wish for an option that grants them flexibility and access to improved personal cash flow. I expect these products to eventually become properly authorised government approved schemes and will be made to meet the same standards as their more traditional deposit protection scheme counterparts, such as offering free dispute resolution. I do think work needs to be done on making the products themselves more affordable as they are still quite expensive. I know that Ome, Hamilton Fraser’s entrant, is looking to provide the product in small, monthly membership fees but I hope to see competition and innovation drive the costs to the tenant down further. I also expect to see tenants given the opportunity to transfer between the new custodial scheme and deposit replacement scheme as and when they require, giving them flexibility over their money that they do not currently enjoy. When it comes to moving out, the schemes will be able to manage the transfer of financial protection to a new landlord without requiring the tenant to save for (or borrow!) and pay a second deposit. Landlords will have the exact same experience when requesting funds from the tenant regardless of the tenant’s choice of scheme.

To conclude…

As our
society continues to enshrine the security of the nation’s renters I see a
world where tenants are expected to look after their money in a way that best
suits their needs. This will not detract from the financial security a landlord
needs to feel comfortable letting someone else into their property as the
schemes will offer redress where required. Tenants will feel trusted and more
empowered to manage their finances and rental wellbeing. It will take time for
our industry to adapt to these changes but, as time goes by, I imagine
landlords questioning why they were ever asked to protect money on a tenant’s
behalf as it’s an added and unnecessary extra step to the rental process.

I’d really appreciate your comments and feedback
below. Challenge my thinking if you disagree! Do let me know whether or not
you’d enjoy reading more of my future gazing. All opinions are welcome and I’d
love to know what else you’d like me to cast my eye to. I’m quite keen to
explore the future of rent payments and how that could intertwine with
something quite close to my heart – landlord redress.

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