The flaws in our real estate market: Justin Kean
OPINION: It appears that the residential real estate market has become a national obsession.
Every time I am at a barbecue or some other form of grown-up party (to be fair, even when I am at a party in the suburbs for my children), the conversation invariably turns to the property market.
Middle-aged professionals seem to pride themselves on having a view on "where the market is going", but few have considered just how the market for housing works, and just how dysfunctional the whole house sale process can be.
The market for residential property tends to operate on a very simple model which is steeped in history.
However, there are several aspects to this market which create significant inefficiencies and are potentially ripe for further regulation.
The key issue is the difference in the amount of market knowledge which exists between the purchaser and the buyer's agent.
The vendor's agent has access to rich information sources which give them considerably more insight into the market than the unsuspecting purchasers, who can do nothing more than attend open homes and ask questions of agents.
According to market regulators the Real Estate Agents Authority, agents need not be experts in all things property, and this protects them from being liable should they sell a property which is fundamentally flawed but not obviously so.
Agents use this protection to not disclose information about a property, and will often go to great lengths to ensure vendors don't tell them anything which they might have to disclose to potential purchasers.
The great tragedy is that although agents have access to so much information about the market, within the sale process, there are no minimal disclosure requirements.
Buyer beware is still the modus operandi for the residential real estate market. This is especially the case with auctions where purchasers have no rights of due diligence or negotiation post-sale, and it is the purchaser's responsibility to gather all the information prior to purchase.
Let me give you an example which demonstrates this.
A residential property is for sale via an auction. Six parties are interested in bidding.
As such, they will need to spend money to get a builder's report, potentially seek legal guidance on the title and undertake planning investigations, particularly in places like Auckland where the planning overlay is changing and uncertain.
In this case, six parties spend up to $2500 each in their investigations, or let's say over $10,000 in total just to be able to turn up at the auction, and one or even none of them may be successful.
Other than paying for an auctioneer and a Trade Me ad, the vendor does not need to outlay anything to sell their property.
There is a mismatch here between those benefiting from the sale and the responsibility owed to the public who are taking a risk on this property investment.
How has this market been allowed to develop in this way? Because it is controlled by agents, hired by vendors and paid by commission.
Would it not be economically more efficient to regulate minimum requirements for disclosure at an unconditional sale such as an auction?
In other countries, we are beginning to see the introduction of this very thing. Energy performance certificates which tell you how much it will cost to operate the home are mandatory in some markets.
Building inspection reports from regulated inspectors are also a must in some European markets – and why not?
When you sell a car, you need to do so with a warrant of fitness that is no more than one month old.
Why not with a house?
Today's real estate model evolved from a time where the information deficit in the market meant you took your property to an agent, agreed to pay him or her a commission and that agent then worked your property.
As the stakes have risen with property values and as the technology has increased to deepen the information void, it is high time that this increasingly inefficient economic model of sale and purchase was re-examined.
Justin Kean is an asset management director for Wairaka Land Company, a land development subsidiary of Unitec in Auckland. He was formerly the national research director for JLL New Zealand.