How the market will fix MLS rules

Comment Eamon Hoey, Financial Post 

The Commissioner of Competition recently made an application to the Competition Tribunal claiming that the Canadian Real Estate Association (CREA) uses control of the Multiple Listing Service (MLS) to impose exclusionary restrictions on the use of MLS.  

The commissioner claims CREA rules on MLS lessen or prevent competition and deny consumers the benefits of competition in the Canadian residential real estate services market. CREA maintains it has adopted the MLS rule changes proposed by the commissioner. However, the commissioner remains unsatisfied with CREA’s changes. It has sought redress from the tribunal.

The commissioner’s challenge hardly matters. Powerful external change drivers are already at work altering the way real estate agents conduct business. These external change drivers are a more disruptive force for change than the heavy hand of government.

Canada’s residential real estate industry structure is riveted around MLS. Until recently, CREA rules permitted only agents to place an MLS listing and required that the agent handle all phases of a sale. This included setting a list price for the property, preparing a written description of the home and uploading it to the MLS system, marketing the property, handling buyer inquiries, arranging showings and managing the transaction.

These rules limited the industry to one business model, restricting competition and service innovation. For example, the rules prevented flat fee and “à la carte” service. The MLS rule change adopted by CREA is a good first step that opens the way for service innovation, greater competition and consumer choice. It is only the beginning of more significant change to come to the sector.  

Technology, demographics, globalization and social and economic change drivers will have a more profound impact on the sector than enforcement of Canada’s competition laws. These change drivers, which will create opportunity for entrepreneurial organizations to innovate, will refocus the industry on the customer rather than on inward preservation of the status quo.

Consumers of residential real estate services have benefited only in a limited way from technology innovation. CREA began to convert MLS from a paper to an electronic system in 1995. While the world is swimming in a sea of technological innovation, the information available for public access on MLS is extremely limited.

For example, MLS does not provide access to listings for homes that have been sold and their closing price, agent fee information and the pricing history of a home. By contrast, U.S. purchasers of residential real estate services have an abundance of information found on real estate sites such as Zillow.com and Trulia.com, which give consumers enormous market power. These sites are effective competitors to Realtor.com, a National Association of Realtors site.

Canadian consumers of real estate services have limited buying and selling information to place downward pressure on house prices and agent fees. It is just a matter of time until an entrepreneurial, innovative, technologically smart organization seizes the opportunity and challenges CREA’s lock on the residential real estate market.

Globalization is a significant change driver for most sectors of the economy. Many countries, particularly the United States, are experiencing significant stress in their residential real estate market. The healthy Canadian real estate sector is attractive to foreign organizations. These organizations seeking competitive advantage and differentiation will circumvent CREA rules and focus on the consumer’s need for a superior value proposition.

Demographics will affect the long-term health of the residential real estate market. Declining fertility, increased life expectancy and an aging population will change the structure of Canada’s population. A house will return to being a place to live rather than a get-rich-quick investment scheme. House prices will decline in the suburbs. Prices in the inner core of cities such as Toronto will stabilize. Demand for large homes will drop significantly.

By 2015, the residential real estate sector will decline as Boomers retire and downsize. This will be somewhat offset by a demand for country homes. New family formation will decline, resulting in reduced demand for new housing. In sum, demographics will negatively affect the residential real estate brokerage sector. The forecast is for a slow decline that will place pressure on the realtor’s value proposition, push for service innovation, and place downward pressure on agent fees.

The Commissioner of Competition’s task is to ensure that competitive forces determine market outcomes. This objective is often achieved through government intervention. However, intrusion in the market place is a quick fix that fails to have lasting effects and it requires long-term monitoring to ensure compliance. Companies soon learn how to game the system. Eventually the government watchdog is indiscernible from the “regulated” company.  

Evolving market demographics, technology, globalization and social change drivers are significantly more effective and more powerful in bringing about change than is government intervention. Change creates opportunity for innovative entrepreneurial organizations. It refocuses organizations away from internal concerns to external consumer needs. Entrepreneurial organizations will cause creative destruction in the sector, bringing innovative services and the benefits of competition to consumers, and greater competitive rivalry to the sector.

In the long term, the commissioner’s challenge will not matter.  

ehoey@hoeyassociates.com

Eamon Hoey is managing partner of Toronto-based Hoey Associates Management Consultants.

Canadian economy grows faster than expected in January

OTTAWA – The stalwart Canadian economy marched doggedly forward in January, growing faster than anticipated thanks to a healthy boost from a manufacturing sector that appeared to be in full rebound from the recession.

The month’s 0.6 per cent rise in real gross domestic product, reported today by Statistics Canada, was the biggest one-month lift in more than two years and just ahead of an economist consensus forecast of 0.5 per cent.

“The Canadian recovery is becoming more fully entrenched and is showing surprising strength, with the goods-producing sector in full rebound mode,” Douglas Porter, deputy chief economist for BMO Capital Markets, wrote in a note to clients.

“Importantly, the recovery looks to be broadening beyond the initial push in housing and consumer spending, as manufacturing has advanced for five straight months.”

The solid improvement will likely put more pressure on the Bank of Canada to raise interest rates in the next couple of months from their historic lows of 0.25 per cent.

Goods-producing industries grew 1.3 per cent, largely on the strength of manufacturing and construction, the agency said. After a 1.2 per cent gain in December, manufacturing was up 1.9 per cent in January, with 17 of 21 major groups advancing.

The construction sector advanced 1.7 per cent, on a four per cent increase in residential construction and a one per cent rise in engineering and repair work. Non-residential building construction bucked the trend, falling off a slight 0.5 per cent.

“These are unambiguously strong results, with GDP now rising at a whopping 6.9 per cent annual pace over the November-to-January period,” Porter said.

“And, the economy has already recouped more than half of its recession losses, with GDP now up by 2.7 per cent from last May’s low.”

The loonie rose following the announcement, moving up 0.43 cents to 98.52 cents US in morning trading.

Mining and oil-and-gas extraction also increased in January.

The production of services advanced 0.4 per cent, led by wholesale trade.

Retail trade, the finance and insurance sector, transportation and the public sector also rose.

Meanwhile, the output of real estate agents and brokers, some tourism-related industries as well as agriculture and forestry retreated.

The volume of wholesaling activity increased 2.9 per cent with all wholesaling trade groups posting gains except apparel and alcohol and tobacco.

Value added in the retail trade sector rose 0.8 per cent in January.

Significant increases were registered in building and outdoor home supplies stores, home furnishings stores as well as food and beverage stores. Declines were recorded at new- and used-car dealers and at gasoline stations.

Porter added that early statistics for the month of February also look promising, with the gain of 60,000 full-time jobs, housing starts up six per cent and auto sales at their highest level in almost two years.

“Given today’s results, and the fact that February is shaping up well, first-quarter GDP growth looks set to easily surpass our recently revised call of a gain of 4.7 per cent (let alone the Bank of Canada’s latest estimate of 3.5 per cent), with growth on track for 5 ½ per cent even if the next two months come in at just up 0.2 per cent.”

The Canadian Press  http://news.therecord.com/Business/article/691423