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Home selling system makes no sense
For years, the regulators were after the broker cartel.
The reason? The brokers owned the marketplace where buyers and sellers came together. And for generations, brokers had been using that monopoly to impose high prices on those transactions. The rates, in fact, were so high they felt like extortion. But if you wanted into the market, what choice did you have?
The above story is about the Wall Street and Bay Street brokerage firms, circa 1975, when they controlled the New York and Toronto stock exchanges.
But I might as well be talking about Canada's residential real estate brokerage industry, circa 2010, and its control of the Multiple Listing Service (MLS) of homes for sale.
This week, Canada's Competition Bureau announced that it is taking the industry's long-standing business practices to the federal Competition Tribunal.
Why? Replace "Bay Street securities broker" with "Canadian real estate broker," and "TSX" with "MLS," and you'll get the picture.
Old-fashioned competition
Competition Commissioner Melanie Aitken, says that the Canadian Real Estate Association is "improperly and unlawfully leveraging" its control of the MLS system "to deny good old-fashioned market competition."
What she wants is to "let consumers have the choice, let agents have the opportunity to satisfy and serve those choices."
Amen and hallelujah.
Of course the Competition Bureau investigated the industry more than 20 years ago, promising big changes to the MLS system. Triumphant press releases were issued. And then nothing happened.
This go around may be different. The government that appointed Aitken is expected to deliver a Throne Speech next month built around the themes of free enterprise, free markets and free trade.
Lowering realtor prices by promoting competition fits nicely into that agenda.
If you'd like to see what might happen if Ottawa really pries open the MLS system, take a look at the history of brokerage commissions on Wall Street.
Within a few months of deregulation on May 1, 1975 — "May Day," to the pin-stripe set — average commission charges had fallen sharply and entrepreneurs such as Charles Schwab were using the new rules to create the first discount brokers.
The arrival of the internet two decades later redoubled the downward pressure on prices.
It allowed consumers to do most of the work of investing for themselves and to rely on a broker solely for the low-cost execution of trades.
Today, you can buy and sell large blocks of stocks through a discount broker for $9.99 or less per trade, a tiny fraction of the pre-May Day price.
Serving clients
The U.S. experiment worked so well that Canadian regulators followed suit in 1983. The Toronto-Dominion Bank immediately set up Green Line Investor Service, Canada's first discount broker. It went on to become TD Waterhouse Discount Brokerage.
Before May Day, if you wanted to buy shares in a company through the stock exchange, your options were limited: Every broker was a full-service agent charging a full-service fee.
That's pretty much what you'll face today if you want to buy or sell a home.
The old system for setting stock market commission rates also matches today's real estate agency commission system.
Pre-May Day, brokerage commissions were based on the number of shares purchased. The bigger your order, the more you paid. That's what you'll be dealing with if you hire a real estate agent and have your home listed on the MLS.
Someone selling an $800,000 house today can expect to pay a commission of about five per cent, or $40,000 (split between the buying and selling agent), regardless of how much work the agents did, and despite the fact that it likely took no more time and effort than earning a $20,000 commission on a $400,000 home.
This can explain why, as the authors of Freakonomics put it, "most real-estate agents seem to spend 95 per cent of their energy chasing clients (for which they are paid nothing) and five per cent actually serving them (for which they are paid way too much)."
In a truly free market, just how far could those commission rates fall?
By many thousands of dollars, according to Scotiabank economist Derek Holt.
He recently speculated that the drop in commission rates might be so steep, putting so much extra money in the pockets of buyers and sellers, as to further overheat an already overpriced Canadian housing market.
No one wants that, but forcing Canadians to massively overpay a real estate agent is not the most rational, efficient or fair way to go about moderating the cost of owning a home.
What's a travel agent?
Another industry that resembles the business of buying and selling houses is travel.
Until a little more than a decade ago, if you wanted to buy a plane ticket or book a vacation, you called up your travel agent, who would take a cut to find you the flights and accommodations you were looking for.
The arrival of new technology-the internet-changed all that. Travel agency commission rates were driven through the floor and thousands of traditional travel agents were driven out of business, replaced by high-volume, low-cost services such as Expedia and Travelocity.
The very same information technology for gathering and making available to customers a world of airline and hotel information already exists for the housing market.
It's called MLS. But as things now stand, consumers can't access all of that MLS information. Nor can they place their own home directly on MLS, or even have an agent provide this basic service for a low fee.
If the Competition Bureau pursues this case to the limit, the future of buying and selling residential properties in Canada will probably look something like a cross between Expedia, TD Waterhouse and Craigslist.
There will still be middlemen between home buyers and home sellers: You will still need a place to advertise your property, a place to compile market information and you may even want some well-compensated expert guidance.
The menu of services offered by real estate brokers may even grow, but some prices will fall and customers will be able to choose what level of service they want.
It will look like, well, a free market. Finally.
Article by Tony Keller. Tony Keller has been an editorial writer, columnist and editorial page editor for The Globe and Mail; a columnist for the Toronto Star; managing editor of Maclean's; and editor of The Financial Post Magazine. He is currently a visiting fellow at the Mowat Centre for Policy Innovation.
February 13, 2010 in Competition Bureau / CREA | Permalink
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Comments
wow!!! it's really good think for me. I have interest in real estate. thanks for your great stuff
Free nexon cash
Posted by: Nehaa | Feb 24, 2010 3:36:23 AM
I Completely agree with (Red Adair). We as agents dont have vacation time, benefits, we work 7 days a week and drop everything at our clients beckoning call.
With regards to For Sale By Owners, over 90% of them endup selling their homes with a realtor. Statistics show that homes sold with realtors vs FSBO's sell for a higher price in a shorter amount of time.
The day the Competition Bureau opens up the MLS to sellers is the day that buyer agents will slaughter them. As a buyers agent we do not owe the seller any duties. Non Realtor Sellers have no idea what is required to sell a home and what is involved in real estate contracts. My theory is that if/when the Competition Bureau and the Competition Commissioner Melanie Aitken open up the MLS to Sellers out there, they will have to recant their decission due to Sellers being torn to shreds on the sale of their home by Buyer Agents.
key point: Sellers without a Realtor WILL LOSE against a Buyer's Agent. Guaranteed:)
Posted by: William K | Feb 20, 2010 3:32:47 PM
Wow, get your facts straight before you blog!
There are tons of For Sale By Owner companies out there...charging their clients $100 - $3000 just to provide a mere listing on their website even before they sell the home...then there are plenty of discount brokerages out there....$500 to list on MLS®, is this not choice?
Can I submit to Craiglist and ask them to send it over to Kijiji? Can I buy a Ford and have GM do the warranty work?
You portray real estate close to the travel industry....when was the last time you took a $500,000 trip!? Give me a break...if you want to order a bra on-line, be my guest, but don't compare internet sales with real estate period...all MLS® does is showcase the home, the REALTOR® puts in the hours to sell it or work with the buyer.....
The competition bureau wants REALTORS® to remove rules which will basically say to home buyer, you are on your own. There is no question about commission rates at all in the Tribunal...it's about "fee for service"...in other words back to the charge someone just to list their home...well as a professional, I don't just list a home or sell a home...this isn't a small purchase, it's a life decision and you need a professional to help you through that. Can you tell a grow op existed? Do you know your rights on a Heritage Home? Can you tell me about the last family that lived there? What room did she die in? Is that shed encroaching the property? Whats the planned development? Can you do an open house today, Wednesday and Friday? Can I show your home six times today while you are out working earning your living? That is only the beginning of many real estate transactions. Then there are the issues we put off to service the client...like working 7 days a week, sorry Johnny, i can't come to your recitle tonight, Mr. Smith wants to kick some more tires......and so on....most work more hours than top paid executives, do more work, and after expences, taxes, make for the most part, we make a bunch less...there are no medical benefits, no vacation time, no sick days, no unemployment insurance, no retirement plan, no stock options, you get the point.
If you want to sell on kijiji or craigslist be my guest, but if you want my professional services and a listing on a system we have built and paid/pay for, then there is a fee....period! Its called freedom of choice, and free enterprise!
If you think hiring a professional is expensive, wait until you hire an amateur! (Red Adair)
Posted by: joe | Feb 20, 2010 11:16:11 AM
Interesting point to make is that FSBO, typically end up listing with a Realtor. I can't remember the stat off the top of my head but it was something along the lines of 90% end up going to a Realtor.
Posted by: Matt Goulart | Feb 19, 2010 11:45:38 AM
Consumer can sell property on Craiglist without professional services - for less expenses. Or use a Professional Realtor with MLS service.
But the Competition Bureau has indicated that some of CREA’s policies restrict consumer choice. An open fair market will fail services or products itself if MLS doesn’t work.
Posted by: Chris | Feb 17, 2010 2:20:06 PM
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