Tue Sep 17

Advertising a house is ridiculously expensive in Australia – could that be affecting the property market?

Written by James Graham, Senior Lecturer in Economics, University of Sydney

Australia has long been one of the most expensive ^[1] places in the world to buy a house. Now, it’s apparently also one of the costliest places to sell one.

Recent reporting ^[2] in the Guardian has raised concerns about the market dominance of Australia’s two main real estate advertising websites, realestate.com.au and Domain.

Facing little competition, the largest – realestate.com.au – appears to have significantly increased its fees ^[3] in recent years, while thwarting disruptive innovations from smaller competitors.

Why does that matter? Because when it comes to selling a house, Australia stands out ^[4] globally. In most other countries, any advertising costs are tiny or bundled in with agent fees.

Here, along with only Sweden and New Zealand ^[5], home sellers pay their own advertising costs in addition to real estate agent fees and commissions.

This advertising can be expensive – up to several thousand dollars for a single property listing. But it also seems necessary, with a lack of alternative platforms offering comparable reach.

Setting aside the problems of monopolistic pricing behaviour, what are the economics of high and rising real estate advertising fees? Do home sellers get value for the money they spend on advertising? And what might be the impacts of these fees on the Australian housing market?

Is advertising on big platforms worth it?

First, it’s worth asking whether real estate advertising is actually effective and whether bigger platforms are better.

To explore these questions, a group of US-based economists studied ^[6] the outcomes of advertising on a large platform favoured by real estate agents in the United States called the “multiple listing service”, compared with a smaller for-sale-by-owner platform.

In the US, real estate agents take care of listing properties on industry-owned databases. Mick Tsikas/AAP ^[7]

The study found no differences in eventual home sales prices between the two platforms. But properties on the multiple listing service were more likely to sell and spent less time on the market.

However, the size of the advertising platform didn’t explain these benefits. Rather, the different platforms appealed to buyers and sellers with varying patience levels. This variation in willingness to “wait-and-see” affected the time it took to sell.

Translated to the Australian context, that raises questions about the value for money of advertising on a larger platform – which here, unlike the US, attracts significant fees.

Housing markets are ‘search markets’

Next, we need to consider how high costs of advertising property might affect the housing market more broadly.

Housing markets fall into a category called “search markets” within economics. Sellers seek buyers, and buyers seek sellers offering up properties that meet their required criteria.

Suburban Australian homes seen from above

Property markets hinge on connecting buyers with appropriate sellers. zstock/Shutterstock ^[8]

The economics of search markets have been extensively studied by the likes of Nobel laureates ^[9] Peter Diamond, Dale Mortensen and Christopher Pissarides. Their insights highlight the key factors that determine search market outcomes.

Sellers consider the costs of listing an item for sale (such as advertising) and the time it takes to find a buyer. Buyers, on the other hand, consider their alternatives to buying (such as renting) and the time it might take to find a suitable seller.

The likelihood of a sale – and how long everything will take – depends on the number of potential buyers relative to sellers. The sales price is then negotiated after meetings between the two.

This gives us a framework to speculate about how Australia’s high – and increasing – costs of advertising real estate could be affecting the broader housing market on both sides of this equation.

Costs can affect both supply and demand

On the supply side, high fees reduce the net financial benefit of selling a home, which could discourage homeowners from listing their properties. All else being equal, this could lead to fewer properties on the market, shorter selling times, and higher prices for the properties that are listed.

But we can predict some effects on the demand side, too.

High fees also reduce the net benefit of buying a home, as current buyers expect to be sellers in the future. These costs are likely to be even more pronounced for property investors, who buy and sell property more frequently than homeowners.

Anticipation that selling costs will be high in the future could suppress the demand for housing, reducing prices and increasing the time it takes to sell a property.

Interestingly, recent research ^[10] from the US suggests that these demand-side effects might outweigh the supply-side effects.

Economists studied the impact of a series of court decisions that forced the National Association of Realtors to reduce real estate agent fees. They found lower fees increase the lifetime benefits of homeownership, which leads to a significant increase in house prices.

Significantly, that suggests lowering the costs of selling property – including advertising – could increase property values.

Just one part of the housing story

High prices in any area of economic life are likely to rankle our sense of a fair deal. High fees for advertising real estate have an obvious immediate impact on a home seller’s wallet.

But the nuanced flow-on effects to the broader housing market are harder to tease out. They are also likely to vary across different property markets within Australia. Commentators and policy makers should think carefully before leaping into action in this area.

In the meantime, advertising fees are one more thing to keep an eye on as Australian housing costs continue to rise.