The Australian property market could be on the cusp of an Uber-like revolution, following the entry of a start-up into Australia that promises to remove the need for real estate agents.
For some Aussie homeowners, the idea of selling homes without the traditional middlemen might appear too radical. For others, fed up with the way that agents cut them out of the selling process — and the commissions they make from sales — the revolution can’t come soon enough.
The company that’s leading the charge in Australia is British-based Purplebricks [LON:PURP]. Purplebricks will officially begin operating in Melbourne and south-east Queensland from today.
The company has already earmarked $17 million to spend on advertising its service in Australia, kicking off its local operation in a highly competitive market.
But should we really expect Purplebricks to flip the traditional way of buying and selling real estate on its head? Well, Purplebricks is a strong believer. And it’s not hard to see why.
Potentially, Australia is a goldmine for companies like Purplebricks. With house prices in major growth areas still rising by double-digits year on year, disruptive technologies stand to gain handsomely from new innovations across the sector. Especially innovations that give homeowners greater control over the sales process.
In truth, the reason why this company has much potential is simple: The service adds real value to customers. It drastically reduces the costs of doing business with an agency…just ask Uber what a reduction in fare charges does for a business.
Even still, we’re not talking about a $10 difference in fares between Uber rides and taxis. No — this is much bigger. The savings homeowners stand to make from selling homes through Purplebricks is not only substantial, but game changing.
Purplebricks will charge homeowners a flat $4,500 to sell their homes using their online platform.
How does that compare to a traditional agent?
Typically, agents charge 2.2% of the sale value in commission.
On a $100,000 property, that’d amount to $2,200. On a $200,000 home, it would rise to $4,400. That doesn’t sound like much of a saving, but try finding a home in Australia selling for less than $200,000.
This is what makes Purplebricks such an exciting prospect for homeowners.
In Melbourne, where median house prices are valued at $725,000, an estate agent’s commission would fetch an eye watering $15,950 at 2.2%.
Compared to a flat fee of $4,500, that represents a saving of $11,450.
In Sydney, where median house prices are valued at $996,000, that figure rises to $21,912.
These are substantial savings. Given the choice between keeping or parting with $20,000, you’d be hard pressed to find people opting for the latter.
How does Purplebricks work?
Purplebricks offers users a tailored online platform from which to advertise and sell their homes. These allow sellers to have direct contact with potential buyers, engaging in dialogue, answering questions, and receiving — and accepting or rejecting — any offers they make on the spot.
In essence, it puts total control over the selling process back into the hands of the homeowners.
So is this the end of the line for traditional agents?
If the success of Purplebricks in Britain is anything to go by, the face of real estate agencies is likely to change dramatically. In a little under two years, Purplebricks has become Britain’s third-largest estate agency. That’s an incredible accomplishment in such a short space of time. And it’s the kind of achievement that will send alarm bells ringing throughout estate agencies Australia-wide.
But we should be clear on one thing. Purplebricks still relies on ‘agents’ — what they call property experts.
These property experts are, like typical agents, familiar with the local housing market. And you suspect many of Purplebricks’ future ‘experts’ will be made up of existing real estate agents.
What’s in it for these agents? After all, won’t they be making less in commission than their peers?
According to CEO Michael Bruce, Purplebricks’ mediators will earn more than they would otherwise at a traditional agency. Although it’s still unclear how much of the $4,500 fee they would pocket themselves.
Either way, it’s not something homeowners will care too much about. They’ll be more concerned about what this innovation can do for their bank accounts.
Yet if estate agencies are worried by this development, they’re not showing it. Some have suggested already that Purplebricks will cater to a niche market at best. The argument being that Purplebricks’ success in Britain will be difficult to replicate in Australia.
For instance, John McGrath, of McGrath Estate Agents, says that commissions are higher in Britain, in addition to property prices outside London being much lower. This, he believes, is the reason why Purplebricks has been able to carve out a sizeable market share in Britain.
He also believes that most McGrath clients have ‘no issues with the fees we charge.’
Agency commissions in Britain may be higher than they are in Australia. And homes outside of London may be cheaper, too. But the comparison doesn’t hold much weight when you consider the sums Aussie homeowners are still paying to agents.
A saving of $11,000-plus in Melbourne is nothing to sniff at. It could very well be true that McGrath’s clients have had few issues with the fees they’ve been slapped with in the past, but you have to wonder what choice they had in the past… After all, a decision between two agencies that both charge 2.2% isn’t really much of a choice at all.
Like Uber, Purplebricks promises to slash agent fees by 50% or more. This suggestion that clients have few issues with what agencies charge is irrelevant in the context of potential savings like this. Purplebricks will, like Uber, finally introduce real choice in a sector which has had far too little market competition.
You suspect that once homeowners see the potential of pocketing five figure sums by using Purplebricks, they’ll quickly begin to find ‘issues’ with traditional agencies.
Time will tell, but it seems likely that Australia’s most popular asset class is about to have its very own Uber-like moment. While the current rollout only includes Melbourne and south-east Queensland, it won’t be long before Sydney, and rest of Australia, follows suit.
Progress requires upheaval, which is why estate agents will be the biggest losers. But anything that benefits the consumer can only be a good thing in the long run.
In fact, it could even make housing more affordable for would-be buyers, as the lower fees work their way into asking prices. And as house prices continue to rise in key markets, that could benefit both buyers and sellers alike.
Either way, as The Daily Reckoning’s property expert Phil Anderson says, house prices will continue to rise in the future. In fact, Phil says we’re at the edge of another boom that could last a decade. And with the RBA edging rates lower again this month, it’s hard to fault his case.
Phil’s 20 years of experience as a property analyst and advisor has given him a keen sense for where the property market is, and where it’s going. He predicted a housing market crash in 2008. He also went against the mainstream in 2009, saying house prices would go on to boom this decade.
He was right on both accounts.
In a free report ‘Why Australian Property is on the Verge of a Decade Long Boom’, Phil guides you through this coming decade. He’ll show you the right time to buy property at its cheapest, and how you can use this to time your investments. To find out how to download his free report, click here.
Contributor, The Daily Reckoning