Are real estate agent fees limiting residential mobility?

Real estate commissions are preventing residential mobility (Source ABS)

Despite an enormous increase in house prices over the last ten years, real estate commissions stayed relatively constant as a percentage of selling price. Agents consequently enjoyed a spectacular increase in the dollars earned on each sale even as the volume of sales was expanding.

In its new report, Getting the housing we want, the Grattan Institute notes real estate commissions are so big they’re a significant barrier to residential mobility in most States. This is an important public policy issue – the ABS reports that even though average household size is falling, the average number of bedrooms per household is increasing (see exhibit). Any barriers that constrain households from voluntarily moving to dwellings that better match their size should to be addressed. And the same goes for barriers that limit their ability to reduce travelling costs by moving to a new residential location.

In most industries, when firms start earning super-profits we would expect prices to be moderated by an increase in competition. However as the Institute observes, this hasn’t happened with real estate agents – competition is weak:

This is consistent with the industry elsewhere, too – the UK Office of Fair Trading recently conducted a review of UK real estate buying and selling. It found that while 32% of those who had used a traditional real estate agent believed that the fees represented either slightly or very poor value for money, 64% said that they did not negotiate a lower fee.

In Victoria, as in most States, there is no set commission, giving the impression of a lightly regulated industry. Vendors and agents are free to work out whatever arrangement they wish, whether it be a fixed sum, a sliding scale, or something else. However according to this real estate consulting group, the customary fee paid by vendors in Melbourne ranges from 1.6% to 2.5% of the selling price. This doesn’t include advertising or even a property sign – marketing is an extra cost borne by the vendor.

This introductory “how to” guide on buying and selling issued by Consumer Affairs Victoria implies an even higher commission. It illustrates a lesson on negotiation between a vendor and agent with an assumed commission of 3.3% up to $500,000 and 3.85% thereafter (p 22). That’s a $16,500 commission on a $500,000 property. I think there’s a fair chance the target market for the guide will interpret this illustration as somewhere around the “going rate”.

There’s hopefully an extensive literature that looks at why the cost to vendors has risen so much and why competition is so weak. If there is I’m not familiar with it and I don’t have time to read it anyway. It seems to me, though, that the internet should’ve reduced considerably the cost to agents of finding prospective buyers and that a good part of those savings should’ve been passed on to vendors. It also should’ve made it easier for innovators to enter the industry and set up new lower-cost business models.

The Grattan Institute reckons the key problem is an information asymmetry – vendors don’t really know what the agent’s skills and knowledge are worth. It proposes governments should mandate that agents make public their sales and commission data. My suspicion is that barriers to entry – in particular the requirement for agents to be licensed – are also part of the problem. In the boom times, nobody who’s in the club has much incentive to kill the goose that’s laying the golden eggs.

Whatever the cause, the Grattan Institute is right to identify real estate agents’ commissions (as well as other transactions costs like stamp duty) as a key inefficiency in the housing market and to call for action to address the problem.

10 Comments on “Are real estate agent fees limiting residential mobility?”

  1. Do you propose unlicensed real estate agents?

  2. Nathan Alexander says:

    I looked around for stats on the income of agents about a year ago and couldn’t find any. I have heard since the average annual income in Australia is about $40,000. If so, agents on the whole are not making a killing. Some do very well, of course.

    The last two properties I sold were both through the same agent. One property sold on the first inspection, the other after four months of grind. Both were at 1.5% commission.

    Bringing down the transaction costs ofmoving home would make for a more efficient use of our housing stock. The state government could encourage buyers of agents’ services to be more savvy consumers. It could also remove stamp duty, which is a bigger cost than an agent’s fees.

    • Daniel says:

      I doubt that $40,000 would be average. Perhaps for a property manager, but certainly not a sales agent. I live in a regional area, where our average house prices are about $350,000. A friend of mine who is an agent makes just over $100,000 a year. There’s two other agents that earn a lot more than her (she just describes it as a lot more, I’m not sure how much that is), and one that earns less.

      I just sold two houses (both under $250k) through different agents, and purchased 1. One had a commission of 2.8% including all costs like advertising, the other I negotiated 2% on the first $210k and 5% above that (they optimistically appraised it at $250k, sold for a lot less). To sell my two houses for $386,000 total, and purchase one house for $245,000, I had $24,500 in transaction costs, a significant amount.

      I’d much prefer to see stamp duty replaced by an annual tax, say 0.75%, with a 50% reduction on principal place of residence. I think this would actually encourage people to choose the cheapest home suitable to their needs. First Home Buyers would be encouraged financially to work their way up, rather buy the large family home right out to save on stamp duty, and elderly to downsize to save on outgoings.

  3. no impact at all on mobility…the vendor pays the agents fee not the buyer
    stamp duties have a major impact not agent’s fees

    • Alan Davies says:

      Agents fees reduce the net proceeds to the vendor from selling the property and so are a disincentive to households to move on to a new property that better matches their (changed) circumstances e.g. empty nesters.

  4. Chris G says:

    Stamp Duty is the real killer. But good to explore this factor too.
    There are alternatives to using a Real Estate Agent, but not stamp duty.

    It is not just the mobility of people, chasing work say, or families breaking up, but changes could also liquefy capital. This could have unintended consequences as real estate becomes a short term commodity wreaking the market’s characteristic havoc on ordinary people as speculators hedging currency risks cause bubbles just when you need to sell your life’s savings to take that job in the Pilbara because the factory in Dandenong shut down.

  5. Alec says:

    Great post as usual, Alan.

    I’m wondering if you’ve got a piece planned about the Vic Government’s submission to IA asking for pre-construction works on the realigned tunnel from Footscray-South Yarra. Particularly, I’d be curious to hear your thoughts about the possibility of a Southbank station being included about halfway between the proposed CBD South and Domain stations (still leaving 1km between each stop).

    Justification for it mainly being the urban agglomeration benefits and renewal opportunities, similar to the case for the Arden Station in North Melbourne; only with a lot more existing demand and development activity, also that the line is passing through Southbank anyway, and another generation may pass before the government is ready to fund and construct a similarly significant metro tunnel. I find it genuinely bizarre that the possibility hasn’t occurred to the DoT to include a Southbank stop given it’s significance in terms of employment resident population (40,000 and 10,000 respectively today, projected to be 100,000 and 70,000 by 2030 according to id consultants figures).

  6. Brad Hall says:

    I want to know how the Internet has been able to destroy the music industry, the newspaper industry and the book industry, but real estate agents are nowhere near being endangered.

    • The internet hasn’t destroyed these industries. Contrary to popular belief the music industry has made more profit every year since the internet became mainstream, the rate at which profits have grown has slowed though. Many, many musicians believe they are better off since the internet. The newspaper industry has suffered and many papers have gone under or are going under, however many other news forms sources have been created, change not destruction. The book industry is booming, Amazon has done extraordinarily well, mainly selling books and ebooks. Some Australian chains have failed, but others stores have actually been doing better since their failure.

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