There is no doubt that many consumers are happy with traditional estate agents. Our consumer research found that 88 per cent of sellers and buyers were satisfied with the service provided by estate agents, a higher level of satisfaction than five years ago (72 per cent of buyers and 74 per cent of sellers).
Where problems arise in transactions, respondents felt that the blame lay with the sellers and buyers on the other side of the transaction or their solicitor, rather than with the estate agent involved.
We did find that almost a third (32 per cent) of those sellers who had used an estate agent believed that the fees they had paid to their estate agent represented slightly or very poor value for money.
While we can say that estate agency markets display low concentration and low barriers to entry, this has not delivered the full range of consumer benefits that we might expect. In particular:
We have no reason to believe that explicit collusion takes place among estate agents. While there are a number of reasons why markets may display weak price competition collusion is only one possibility. We are not accusing estate agents of collusion.
There are a number of features of the market which are behind the weak price competition including consumer behaviour. Consumers focus on the achievable selling price, not the level of commission. Relatively few consumers, compared to the US for example, successfully negotiate on fees. It is rational for estate agents to hold their fee rates steady and just give discounts for those consumers who actively shop around and negotiate hard.
There are a number of reasons why a robust comparison cannot be made, including a lack of reliable data, major differences in the home buying and selling process in different countries, differences in the services supplied by estate agents and the difference in property prices across countries. It is fair to say, however, that in percentage commission rate terms, the UK does seem to be at the lower end of the range.
It is important to note that markets in other countries are also not without problems.
We do not think that there is any case for regulatory intervention in the form of caps on commission. We think that there is the prospect of the market solving the problem and the debate and attention should be on how new forms of entry can be encouraged.
New models are emerging which offer consumers a choice and there are encouraging signs that more consumers are willing to consider using them. There is some legislation dating from 1979 which might be hindering this process and, in the OFT's view, this legislation should be updated as soon as possible.
There has been a great deal of innovation around Internet property portals with the emergence of large, popular sites such as Rightmove. Behind the portals the market is still dominated by traditional estate agents, whose business practices and charging structures have remained largely unchanged over the years.
Some new business models have emerged in the UK, such as online estate agents and private seller websites but, to date, uptake has been limited. Large well-known traditional estate agents have not been amongst the firms to develop alternative models. Of course, many consumers are satisfied with traditional estate agents and do not seek an alternative. It may also be the case, however, that it is rational for traditional estate agents to wait to see whether any of their large competitors change business model before it seems worthwhile for them to do so.
In the US, by contrast, there is some evidence that alternative brokerage models have grown to represent approximately 15 per cent of transactions in 2005 and 2006.
Our consumer research explored attitudes to alternative business models and found that over a quarter of sellers (27 per cent) who used a traditional estate agent had considered using an alternative selling method, and slightly more than half of these specifically considered an online estate agent. While this is still a minority of sellers, the online estate agents and other alternative models are generally quite small scale and relatively new, so even this level of awareness and interest is significant and represents an important change since our 2004 study.
Our consumer survey reports that six per cent of sellers who used a traditional estate agent didn't consider selling privately because they wouldn't have access to portals. Additionally, 20 per cent of these cited marketing ability, of which property portals are a major component, as a reason they decided to use a traditional estate agent.
We found that, of the online estate agents' websites we reviewed, all listed property on all the major portals. This does not suggest that there is a need to intervene to ensure that online estate agents are able to access the major portals.
We did find that many private seller websites and classified advertising websites are not able to access the major portals but we believe that there is a prospect of a market solution to this issue.
In particular if some of the regulatory barriers discussed earlier are removed, it seems clear that there is scope for a new player to enter this market and provide a platform with the necessary scale to overcome the issue of network effects in this market and the brand to overcome the issues of trust which currently persist in on-line markets.
Google, not the OFT, is best placed to answer questions about Google's plans.
It is hard to see either a significant positive, or negative, impact of HIPs in their current form. Nevertheless, HIPs make information available to prospective buyers early in the process, and some buyers say they find the information useful and it influenced their decisions, so could be argued that HIPs in their current form have a positive impact.
We believe that the price differential identified in the Which? Money report may be a temporary phenomenon - the HIP market is relatively new. We understand that many HIP providers entered the market following the introduction and roll-out of the HIP requirements in the period between August and December 2007, but that the housing market started to fall shortly thereafter, which meant many suppliers were chasing a falling number of transactions. This resulted in a collapse in the wholesale price of HIPs.
We would expect any gap between wholesale and retail prices to reduce over time, as consumers become more familiar with HIPs and as direct sales become more common. Currently the market is quite fragmented and HIP providers rely on the larger estate agent chains to put custom their way. We would not expect excessive mark-ups to be sustainable over time - if retail prices remain high, HIPs providers will more actively market themselves directly to sellers which would put pressure on the margin estate agents can charge.
The case for a mandatory seller-commissioned Home Condition Report in England and Wales is not clear cut. The majority of buyers do not at present commission a survey in addition to the lender's valuation report. Some sellers would be commissioning surveys that would not otherwise have been done. While for some properties that may be a good thing, for others a survey that goes beyond the lender's valuation report may not have been needed.
Our survey found that a large majority (78 per cent) of buyers felt that a survey at the outset would be helpful or very helpful. When asked if they would trust a seller's survey, 16 per cent of buyers responded that they would not, 55 per cent would to an extent, while 29 per cent responded that they would rely on it.
On the introduction of the Home Report in Scotland, which includes a mandatory seller-provided survey, the law in Scotland was changed such that surveyors providing Home Reports are liable to buyers and lenders relying on the survey, as well as to their seller clients.
Our research suggests that there is a clear theoretical problem with estate agents earning income from ancillary services sold to buyers. There is the potential for distorted incentives in this area that may create a conflict of interest with the estate agent's duty to act in the best interest of the seller. We have considered a number of remedies, including an outright ban on referral fees, but we do not at this stage have sufficient evidence to say which of the possible remedies would be proportionate. We are nonetheless sufficiently concerned to recommend that Government consider a statutory response to the issue, perhaps as part of its review of the future of estate agency regulation.
The actual costs and benefits of a change depend on a complicated combination of factors, some of which will vary over time and between different geographic regions, for example, the prevalence of chains of transactions.
The practical difficulties of mandating such a change may be significant - success is likely to depend on the detail of any new process and the willingness of consumers in England and Wales to accept the change. Nevertheless, while it must be acknowledged that it is not possible to quantify with certainty the costs and benefits of introducing earlier commitment, it is clear that the potential benefits might be substantial.
There is already a great deal of legislation which covers all estate agents and is designed to address serious concerns.
Enforcement of existing legislation could be made more effective and the OFT has set out a programme of work aimed at making this happen with the objective of using the resources that are already available in a more effective way. In the current financial climate, doing more with existing resources seems the best place to start.
The OFT is not convinced that there is a good case for more regulation which will impose costs on the tax-payer or on consumers buying and selling homes. In addition, the OFT is reluctant to see any form of entry barrier, or extra regulation, which may further entrench the model of traditional estate agency.
If anyone has serious concerns about the conduct of a particular estate agent then they are free to complain to the OFT or Trading Standards. Providing the complaint is well substantiated, and isn't motivated by commercial concerns but by genuine consumer protection concerns, then the OFT will take the complaint seriously.
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