Real Estate Brokers: Do they inflate housing prices? - CEREG

1. IntroductionHousing expenditures represent a large part of household spending and is a major economicindicator in industrialized economies. As the real estate brokerage industry plays an importantrole in the residential market, it is worth analysing the impact of this industry on the sale priceof houses. The present paper examines the effect of real estate intermediation on sale price inthe French residential market.A recent national survey 1 conducted by the Direction générale de la concurrence, de laconsommation et de la répression des fraudes - which is the French agency in charge ofensuring fair trade and competition - found evidence of numerous offences in the real estatebrokerage industry. Out of the 1070 real estate agencies that were inspected, 830 (77.6%)were in violation of the law. The main infractions concerned misleading advertising, absenceof commission displays in the agencies, absence of professional ID card, and real estateagents' operating without mandate from owners. The impact of real estate agents on housingprices is an important issue as, along with the frauds recorded in the survey, it may potentiallytrigger legislative changes in the real estate brokerage industry.Home sellers may either try to sell their house on their own or seek the assistance ofprofessionals. The real estate broker is one of these professionals. A seller, marketing hishouse without intermediation of real estate brokers, bears the cost of searching for buyers andthe cost of showing the house. Similarly, home buyers face the costs of gathering information.These costs are borne by real estate brokers when involved in the transaction. Indeed the mainrole of the real estate broker is to match the level of housing desired by buyers with housesproposed for sale. In order to accomplish this task, they collect information about both buyersand sellers, and house characteristics. Under French law 2 , the real estate agent has theobligation to inform and advise both the buyer and the seller, guarantee the reliability of thetransaction, facilitate the bargaining process, and carry through the transaction. For all theseservices, the broker charges a fee which, depending on the real estate brokerage contract, canbe either at the seller’s expenses, the buyer’s expenses or shared between the two. Generallythe commission paid to the broker is a percentage of the sale price which is displayed in theagency but can be negotiated. The brokers have the incentive to sell at the highest price in1 Published in the review Concurrence & Consommation, n° 154, July-August-September 2007.2 Hoguet act of January 2, 19702