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Real estate: Britain’s most disappointing industry

Here follows some of the background thoughts behind my column in today’s Times

You’d probably guess that the single biggest sector of the UK economy is retail. What you might not have realised is that it has very nearly being overtaken (in terms of its contribution to Britain’s gross domestic product) by real estate.

That’s right, real estate is now officially only a whisker away from being the dominant industry in the UK It is now significantly bigger than the financial sector or the manufacturing sector, in terms of its economic output. Back at the turn of the millennium it accounted for 9.4% of UK gross domestic product, compared with 12.8% of GDP which came from manufacturing. Today it accounts for 11% of output, while manufacturing provides 9.6%. The comparative size of the retail sector has remained relatively steady at 11.8%.

Just look at the chart above, which shows the composition of Britain’s economic output, divided up by different industries. You can see how the real estate chunk (that mustard yellow element) has grown bigger and bigger since 1990.

However, there are two things the chart above doesn’t show you. First, that the overall size of GDP has been increasing for most of this period – save, of course, for the 2008-9 period when Britain faced a deep recession. Second, it doesn’t adjust for population. You’ll probably recall that while the size of the overall economy is now bigger in terms of total economic output, output per head is still lower than in 2008, because much of this extra income is due to there being more workers. In other words, real economic progress, improved efficiency and so on, are best measured by dividing economic output by the number of workers.

When you do this for individual sectors of the economy, there are some interesting findings. Although the comparative contribution of the manufacturing sector might be considerably smaller today than at the turn of the millennium, it manages to generate this output with 1.4m smaller employees – so its output-per-worker is up by 45% since 2000. The same goes for overall UK output-per-worker (up 13%) and most sectors that are not either volatile (eg oil, mining) or regulated (eg utilities, transport, schools etc).

But have a look at the chart below, showing the comparative changes in output per worker in various industries since 2000, and see if you can spot an outlier:



Yup – it’s real estate, where output per worker is down 18% since 2000. In fact, output-per-worker fell in 10 of the past 15 years. In other words, save for some outliers (“households as employees”, by the way, is so small as to be almost insignificant in the grand scheme of things) real estate has had the poorest productivity performance over the past decade and a half.

That raises a question – the one that forms the bulk of my column: is the real estate sector seeing the kinds of innovation leaps we are witnessing elsewhere? I’m not so sure. While there are plenty of property listing sites out there (Rightmove, Zoopla etc) the business of actually buying a home still almost always goes through estate agents.

The core of the estate agency trade is the connection of sellers with buyers – intermediation. It is akin to travel agency, or a minicab company’s booking line. Just look at what travel booking websites and Uber have done for those trades – why isn’t the same thing happening in estate agency?

Well. I’m stumped for an explanation. Britain’s real estate business is far less regulated than in the United States or almost any other country in the world. You can get a sense of how seriously the powers-that-be judge estate agency regulation to be by the fact that recently the job was handed down from the Office for Fair Trading to Powys County Council. Yes that’s right, Britain’s second biggest sector is regulated by a local government in deepest Wales, which is already suffering enormous cuts as a result of austerity.  The industry has to obey money laundering regulations, but even there it is far more reluctant to report suspicious activity than other sectors.

So it’s not as if estate agents have much regulatory protection from disruptive innovation.

Is it because there is something estate agents do that couldn’t be done by a website or algorithm? Speak to an agent and tha’ts what they’ll tell you: that every house is different, so valuing them is hardly straightforward; that buying and selling a home is an emotional process, and that it demands someone who knows the local area. These are all good points. Then again, other trades have confronted similar obstacles successfully.

That said, buying a property is a big financial decision. We know from behavioural economics that people tend to be very cautious when handling their own money. That’s one of the reasons why finance hasn’t been disrupted by the internet quite as quickly as cabs or travel (though there are many peer-to-peer finance firms now making a decent stab of it).

And there are deficiencies with our system of homebuying that exacerbate this dynamic. One buys and sells things on the Internet because there are usually well-defined consumer laws standing behind us.

The archaic process of buying and selling a property in England and Wales hasn’t been properly overhauled in decades. It involves months of legal limbo and word of mouth agreements which can easily be thrown out, ignored, gazumped, at great monetary and emotional cost to at least one side in the transaction. No wonder so many of us would rather have an estate agent holding our hands through this ordeal, even if we know it will cost us.

In other words, perhaps we are paying for peace of mind.

Then again, that shouldn’t stop us asking whether the process could be done better, more cheaply and more efficiently. There are a few companies starting up in this sphere, and Paul Murphy of FT Alphaville wrote a nice blog about them the other day. However, disruption is taking far longer in this field than one might have expected. Tellingly, it is happening far faster in the US than here. That underlines my point. Until the Government overhauls the medieval process of homebuying, the estate agency industry will never be truly disrupted.

This is a great shame. The rest of the economy is becoming leaner, more profitable and providing a better service to consumers. Why not property too?

PS Note that, as Seamus Coffey points out, the largest chunk of that real estate GDP contribution is made up of imputed rents for properties, rather than fees to estate agents [however, the productivity change since 2000 is still negative (actually even more so) when you exclude imputed rents]:

3 thoughts on “Real estate: Britain’s most disappointing industry”

  1. Nice companion to the Times column, thanks.

    There are two main reasons we see for slower adoption than other industries.

    One you’ve covered which is the financial size and implication of the transaction; this boils down to “I could try to save ~£5,000 in fees (based on average sales price and commission), but this will be more than wiped out if I underprice by even 2%. Surely an agent will know the best price and negotiate better than me?”

    The second is the infrequency of the transaction: people sell a house on average every 7 years. That means the last time the “average” seller considered her options was in 2008, when Twitter was less than 2 years old, fewer than 10% of us had a Facebook account and trust in the internet was far less developed. Since then – being an average kinda gal – she will have booked 15 holidays and taken 63 taxi rides.

    Things are progressing more quickly in lettings. Here the dynamics are more favourable: the average tenancy is 18 months, the transaction is lower value and less permanent, and given there are ~4x as many lettings per year than sales, there is better and more recent data on how to price. As a result the largest online agent, OpenRent, (disclosure: I am a director) let 2,000 homes in Jan: that’s more than Foxtons according their most recent annual report.

    And as for the customer experience, who ever heard of an estate agent receiving 5* reviews from 95% of its customers?! The opportunity to deliver better service online is even greater than the cost savings – so biased as I am, I see a bright future for consumers in the property industry. Sorry it took so long.

    1. Good points Adam. From Freakonomics (Levitt, Dubner) “When she sells her own house, an agent holds out for the best offer; when she sells yours, she encourages you to take the first decent offer that comes along.” – Given the selling agent fee in the UK (1.6%) is only half that in the US (3%), you can be sure they are not incentivised to get your a better price if they are operating on a no-sale/no-fee basis. They are incentivised to get you to take the first offer that comes along, which is why HomeTrack finds on average UK agents only achieve 96% of asking price. We like to see the homeowner’s needs come first, and believe their satisfaction is the most important measure of success. (and we find that a better price, 99%, usually results from this)

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