Monday, June 8, 2009

A good monopoly?

There was an interesting discussion in the BC twitterverse yesterday regarding some recent news about the CREA, the MLS system and the Competition Board of Canada--an independent consumer protection watchdog type organization. The discussion, as far as I can tell, originated with influencer-in-chief, NeedsAnalysis. As I read it, Roger was asking whether or not the CREA exercises monopolistic control over the RE market and more specifically the MLS system. Roger provided many great links to foster discussion:
  1. Competition Board speaking notes
  2. US Blog about CB visit for learning and professional site of blogger
  3. Another blog explanation
  4. Monopoly defined
  5. And a VanSun article written by a paid PR person to influence the consumer to fight back against the rising cover-your-butt-ism in the RE industry (I can only assume since it's mostly poor us fluff)
When I engaged in two tweets last night with the agents most active in the discussion, I garnered two truths:
  1. It is a monopoly--but as suggested by the agents, it's a monopoly that benefits everyone involved
  2. The CREA does exercise monopolistic control over the MLS system
CREA rules prohibit home sellers from purchasing just a listing in the Multiple Listing Service from a real estate broker. If a seller in Canada wants to list their property in the Multiple Listing Service they must also purchase a bundle of services including negotiation and contract assistance. This, of course, affects the price that sellers must pay for real estate brokerage services.
In observing the real estate market over the past two years and more as closely as I have, there is one conclusion above all else that I have arrived at: The real estate industry has won the communications battle:
  • Media repeats their press releases as truth without much investigation, if any
  • The consumer has accepted that commissioned sales peoples opinions are expert
  • Dissenting voices in the public realm are marginalized or chilled through threat of libel wherever possible (see what agents can and can not say about themselves and their industry organization)
I don't believe that we can change the outcome of the communications battle. Not without significant funds and coordination, which the consumer doesn't have, and the CREA has plenty of. Nor would I advocate consumers down that path.

If Canadian consumers want the situation to change, I see two definite paths:
  1. A new paradigm where the buyer pays a commission (the buyer pays the commission anyway, but the fog of words and literal truths used to confuse everyone means they "literally" don't)
  2. An open, competitive MLS system whereby any seller, be they agent represented or not, can PAY a fee (I'd be fine with agents paying less fees than non-agents) to have their property listed
  3. An open and transparent statistical data system whereby any private actor can PAY a fee to access a detailed statistical database of real estate transactions (I'd love to see a crown corporation like BC Assessment start tracking this and charging interested consumers for detailed databases)
Edmonton Housing Bust has an interesting post on the demise of ComFree in the downturn. Would my suggestions above provide greater competition and choice for the home buyer and seller? Will they level the playing field for competitive services like ComFree and ZooCasa? Is this making a mountain out of a molehill?

13 comments:

Kevin said...

I agree, I think it would a lot better for all involved if the buyer was responsible for compensating their own agent.

The set up as it is just seems intentionally ambiguous, and needlessly confuses the buyer and seller.

By allowing the buyer and seller to independently obtain and compensate their own agents it makes things a lot more straight-forward and transparent.

Reid said...

HHV, I chased this same proposal down about ten years ago as I got so frustrated by realtors. But in doing it I realized that at the end of the day most people are cheap and will not pay for the "buying" service. Therefore the structure that the real estate industry has set up works perfectly for them and buyers love it as they perceive they are getting a free service.

It is a monoploy and in many cases there is serious conflict of interest issues that would never be allowed in other "professions" (not sure real estate sales is a profession).

But to change it would be a major effort as too much money being made and spent from it.

Roger said...

There are many different business models for selling real estate. The US and Canadian MLS systems were very similar until court action, consumer pressure and realtor innovation led to a more open system in the US.

Kevin mentioned that the buyer should directly pay a fee to their agent for services rendered in order to avoid ambiguity. When I lived in Holland the buyer paid ALL commission fees and the seller got the agreed purchase price without any deductions. Because agents were paid a fee by the consumer receiving the service they also were interested in handling residential rentals.

Reid said...

Dumb Canuck, sorry for late answer to your question on the last post. Most weekends I leave town with my kids so I am away from the computer.

I would define a person as truly financially literate when they can apply a holistic approach to making a key financial decision. By that I mean they can factor in the implications of a financial decision on other aspects of their financial life both short and long term. In order to be financially literate someone has to have a good handle on the following knowledge or skills:
• Budgeting and cash flow management and then apply these principles to their daily lives
• Retirement planning and sheltered retirement investment tools
• Understanding of assets allocation and basic investment approaches
• Understand the time value of money
• Understanding of economics and how changes impact their life
• Decent understanding of personal taxation
• Ability to look out and plan for the long term (as financial success only really comes over the long term)
• Can assess potential risks/opportunities and factor these into possible scenarios and outcomes

The problem is that to learn and apply all of what I describe above will take most people a long time to master. Given that we teach basically none of these skills to our youth in school or at home or even in our universities, it is no surprise that few people in our society are truly financial literate. Even if someone knows all of this, it does not mean they will apply it to their own lives. My father worked in the financial industry, made a great living and had all of this knowledge, but he had no discipline and died bankrupt.

Although most of us are not financially literate, we can do extremely well financially if we only understand and can apply the first point above. Do you know how to budget and does one understand that getting ahead financially requires you to spend less than you earn? If one understands this simple rule and you live to it, then you have a real opportunity to live a financially rewarding life.

The people I refer to as financially illiterate are those do not apply that first rule above and live beyond their means. In terms of buying a house, these people will assume that if the bank is going to lend them 5 times their income, then they obviously can afford a house and will typically buy to the maximum of their debt capacity. There will be no longer term consideration as to whether higher interest rates will impact them or if they can properly save for retirement. These people often look to their realtor and mortgage broker for advice on the home they should buy and mortgage they should take on, but do they understand the problem with their biased advice?

Looking backwards the financially illiterate in Canada were generally spared from despair in retirement because most Canadians retired with a defined benefit pension plan which gave them a secure post employment income. Looking ahead twenty years, few outside of the public sector will retire with these types of pensions and therefore it is far more important today to understand financial concepts and apply them.

Roger said...

Reid,

You hit another one out of the park with your last post.

HHV - Would you consider using Reid's comments as a guest post to kick off the next topic?

Reid said...

Roger, thanks. Although it is not my career, finanical planning is my passion. I see little few other forms of education that can more positive impact our society over the longer term than this.

HouseHuntVictoria said...

Roger & Reid,

I'll move that post up shortly.

Reid said...

Campbell now suggesting BC deficit could grow from $495 million. He also confirms that the new budget will be delviered on Sept 1st.

BC Deficit

Dumb Canuck said...

Reid - thanks. This was just what I was looking for - both to improve my own financial literacy, and because you were on to something with your comments on the topic.

It could be the start of a good discussion.

FWIW - I'm personally pretty good on most, but weak on #2, 3 and 8. Probably too risk adverse/putting too much weight on low probability outcomes.

Metaldwarf said...

B.C. housing slump 'nastiest' in nation

Vic said...

Shiller Says U.S. Home Prices May Decline for Years


(Bloomberg) -- U.S. home prices may continue to tumble for years, according to economist and Yale University professor Robert J. Shiller.

“Our sense that housing is a wonderful investment is really damaged now,” Shiller said in an interview with Bloomberg Television today.

The state of the economy will have a greater impact on interest rates than the housing market, Shiller said. The recession may end later this year, though the recovery may be lackluster, he said.

“We may have a recovery, but I suspect it will be a disappointing one,” Shiller said.

StargazerXL said...

Shiller Says U.S. Home Prices May Decline for Years


(Bloomberg) -- U.S. home prices may continue to tumble for years, according to economist and Yale University professor Robert J. Shiller.


Here's one American import I would be really happy to see...

Art Vandelay said...

Real estate boards have proprietary rights over their own databases, which combine under the auspices of CREA to form what we know as MLS. The MLS is used to populate Realtor.ca. It is no more a monopoly than Microsoft has a monopoly over Windows. It's their product.

If critics, programmers, sellers, buyers, or other interested parties would care to create their own listing service, the world is their oyster.

Organized real estate also does not have a monopoly over selling and/or buying real estate, as any number of FSBO options exist.

Organized real estate can be viciously anti-competitive, however. They have a strong lobby effort that calls for, in the name of protecting consumers, more and more regulation. Consumers, being retarded, think that regulations protect them. So government gives both parties "what they want." And what you get are rules that thwart competition.

Furthermore, because buyers mostly don't care to pay for the services of a buyer's agent, organized real estate has established a method of doing business whereby overhead is covered and profits captured from successfully sold listings. It is highly inefficient to be running around trying to get listings when what realtors should be doing is helping people buy houses that are listed - whether on MLS, FSBO, whatever. But until people are willing to pay for it, it's not going to happen.

And then they could start calling themselves "salesman" and make no pretense of expertise other than having a system of trading keys and inputting listings. Disclaim any fiduciary duty, in writing. And pawn off all questions to home inspectors and lawyers. And charge strictly for their time.

But it won't happen in my lifetime. There's no incentive for the huge brokerages to change and your average moron consumer is suspicious of anything new. I should know. I tried the discount brokerage route and mostly it got me greedy sellers and non-committed buyers. The committed sellers and buyers aren't enough to compensate.

Consumers get what they deserve, frankly.