While Singapore’s property market has shown signs of cooling and there have been warnings of risks in the cooling measures, our love affair with property investment continues to thrive.
In fact, property remains a key component of household wealth in Singapore, with 47 per cent of household assets tied up in real estate, according to Credit Suisse.
However, for many people, buying or selling a house is a financially and emotionally demanding experience, and we need to be guided through the complex process.
In Singapore, real estate agents play an important role in valuing and marketing properties, lining up prospective buyers, negotiating the best deal and guiding one through the transaction.
Real estate agents have market knowledge about local areas and property market activities. They know which properties are selling, how quickly and for how much.
With real estate agents knowing more about their area of expertise than the people paying for their services, do real estate agents exploit their knowledge advantage for their own interests?
My answer would be yes.
In a recent research paper with colleagues at National University of Singapore (NUS) and Nankai University in Tianjin, China, we found significant evidence that real estate agents exploit this information advantage to buy houses for their own use at prices that are about 2 per cent lower than prices for comparable houses bought by non-agent buyers.
We examined data across a seventeen-year period (from 1995 to 2012), gathered from more than 100,000 private non-landed housing transactions, including homes purchased by real estate agents registered with the Council of Estate Agencies (CEA).
We looked into two possible ways agents could exploit their information advantage.
First, we analysed if agents used their information advantage to “cherry-pick” the houses they buy from a selected group of sellers.
Second, we examined if real estate agents used their information advantage to increase their bargaining power against sellers, so that the agents pay less for their own homes.
We studied these possibilities by looking at transactions among “weak” and “strong” sellers.
Weaker sellers included time-pressed individuals who needed to sell their current houses before moving into new homes, as well as distressed sellers facing lawsuits relating to bankruptcy, car accidents, sales of goods, credit cards and tenancy disputes.
Weaker sellers also included firms which usually buy houses as residency perks for foreign executives and want to quickly sell houses when they are no longer occupied.
On the other hand, investors who sell houses for a positive return, and are not under pressure to sell houses below the market value, are stronger negotiators.
While we found no clear evidence that agents used their information advantage to “cherry-pick” weaker sellers in housing transactions, our data shows that agents do pay lower prices when they buy their own houses from weaker sellers.
In contrast, no price discounts were found in houses bought from the “stronger” investors.
This points to real estate agents using their information advantage to negotiate prices downwards when they deal with weaker sellers.
The results of our research contribute to earlier studies showing that real estate agents could tilt the bargaining power in their favour to cause price distortion in the market, and this is something to bear in mind as we watch property prices.
But the good news is that with so much information now available on the Internet about properties and previous transactions, this information advantage will be eroded. Also, the CEA’s regulatory role in inhibiting unethical practices, such as dual representation and information shrouding, has worked.
The CEA was set up to raise the professionalism of the real estate agency industry and protect the interests of consumers in Singapore.
It is empowered under the Estate Agents Act (Chapter 95A) to regulate practices of licensed agents and salesmen in real estate transactions.
It is apparent that since its establishment, the significant discounts that agents enjoy when buying houses for their own use have decreased.
That said, when one is selling a home to a real estate agent, it makes sense to research the local market and have a clear idea of what the property is worth to realise its full value.
•The writer is Low Tuck Kwong Professor and vice-dean of PhD and research at NUS Business School.