As an independent economist, I was engaged by Purplebricks to look at some key facts on the Australian property market as they considered how they could disrupt and recast the industry but in doing this work, I was impressed with their business model.
Over half a million houses were bought and sold last year. The average price was around $614,000 and so far in 2016, prices have risen by another 5 to 6 per cent.
For established real estate agents who charge a flat percentage fee of the sale price of a house, this means that the value of the fee rises has been at the same pace as house price rises and has nothing to do wages growth in the general economy or the amount of work a real estate agent does to market and sell a house.
Working on a conservative assumption of a 2.2 per cent flat selling fee, plus about $2,500 marketing costs for each sale, home sellers paid around $5.75 billion to real estate agents last year.
These fees are excessive and ripe for new competitors to enter the market.
On that score, the real estate industry is about to confront some serious competition from a new entrant to the market.
Purplebricks have judged that the market for selling property in Australia is ripe for a new competitor to enter the market. The existing fee structure was framed more than a generation ago and characterised by high fees that cost property sellers dearly whenever they sell their house.
It is clear to me that real estate agents have been making considerable profits from home sellers as the three decade boom in house prices has massively outpaced wages for the rest of the workforce.
A flat fixed commission charged by real estate agents means that the dollar value of their commissions has increased by six-fold over the last 30 years, in line with the rise in house prices. Over that time, average wages have risen by 215 per cent meaning that the average real estate agent commission for the sale of an average dwelling has more than doubled from just over 10 per cent of average annual wages to around 23 per cent.
And this extraordinary rise in commissions paid by home sellers has occurred when the efficiency and productivity gains in the real estate industry have lowered many of the costs associated with being a real estate agent.
Here is an example of what we are dealing with.
Every month, it seems, there is an update of the suburbs in the main cities where the average house prices has hit and exceeded $1 million.
Under the current formula for real estate agent fees which is generally set at a fee of 2.2 per cent of the selling price plus $2,500 or so for marketing materials, the commission a seller would pay to the real estate agent of a $1 million property is around $24,500. That is a huge fee, particularly in a rising market, where houses often sell in 5 to 6 weeks.
Under the alternative fee model of Purplebricks, there is a flat fee of $4,500, which includes marketing. This is $20,000 below the traditional real estate agent fee for the same service.
The entry of Purplebricks to the Australian real estate market will see home sellers save a lot of money. This money will be freed up to be spent elsewhere in the economy and at a time when the rate of growth is sluggish, this will be a good thing.
Stephen Koukoulas is Managing Director of Market Economics, a firm he established in January 2012 in response to the need for independent and tailored macroeconomic analysis.
Stephen has a rare professional experience with 30 years as an economist in government, banking, financial markets and policy formulation. Stephen was Senior Economic Advisor to the former Prime Minister, Julia Gillard, worked in the Commonwealth Treasury and before that he was the global head of economic research and strategy for TD Securities in London.
Stephen also spent 5 years at Citibank Australia, including as Chief Economist. He started his career is as an economist in the Commonwealth Treasury in the mid 1980s.
Stephen is currently Economics Advisor to Dun & Bradstreet, a Research Fellow at Per Capita and writes regular analysis and opinion pieces for The Guardian and Yahoo 7 Finance.