This weekend say another Freakonomics column in the New York Times. This one was about real estate agents in the United States and how competition limits their returns. In the US, real estates earn a fixed commission of between 5-6% in total with half going to the buyer’s and half to the seller’s agent. The commission doesn’t vary but during real estate booms the number of estate agents does. So real estate agents don’t actually end up earning more when business is supposedly good.
My experience here in Australia (we have sold two houses and bought three) is that agents’ commissions are negotiable. During boom times, the commissions fell to below 2% and you are also able to negotiate more novel commissions to ensure that agents push for the marginal dollar. Moreover, we also save on not having to have a buyer’s agent. This gives me pause as to what those agents do in the US!
So here is a situation where we seem to have a far better system. Competition works on price rather than on entry and we only have one agent per sale we have to deal with. That also means that there will be less incentive for real estate agent alternatives — such as those described in the Freakonomics column — to crop up here in the near future.