A toxic mess: vested interests and the real estate industry

Young academic Philip Soos is an outspoken critic of those who seek to ‘game’ Australia’s land market. This scathing indictment from The Conversation today.

Conflicts of interest undermine the quality of advice and policy. It is critical to the functioning of markets and government that parties involved are free of conflicts, especially monetary ones. We would like to believe others are ethical, engage in honestly practices, and do not withhold or manipulate information for selfish reasons.

Sadly, the real estate industry is saturated with such conflicts. Individuals and organisations with direct and indirect connections to the industry are so plagued by conflicts of interest that the industry is a textbook example, along with the defence and pharmaceuticals sectors, of what not to do.

Real estate agents make their living from the commissions on real estate transactions. Thus, it is in the agents’ self interest to maximise the volume of transactions. It ought to make little difference whether prices are rising or falling, but in practice it matters a great deal. In a property market of high volumes and rising prices, agents can make small fortunes. Real estate is a big business and where vast amounts of profit can be made, and where corruption and dishonesty inevitably corrode ethical practice.

Australia’s market from 2001 to 2004 was an era of golden rewards. Gripped by speculative fervour, owners engaging in “flipping”, or short-term reselling of property for capital gains. It is the profits realised from flipping, backed by lax lending standards and preferential tax treatment, that drives the market into a Ponzi or pyramid scheme.

Agents are faced with a set of incentives to optimistically promote (“spruik”) the prospects for the property market. If prices are increasing, they say, “buy now or be left behind”; if stagnant (tracking inflation), “buy now because the market is soon to rise”; or if prices are falling, “buy now because housing affordability has never been better and the market has bottomed out”.

Sound familiar?

Likewise, RE intelligence firms face a set of incentives to argue property is always a good investment regardless of market conditions. Their public faces are articulate and well educated, which comes in handy when offering technical arguments that rationalise sky-high housing values, and claim with confidence prices are based upon fundamentals and could never fall. The fact that they always assert this even when, in reality, a bubble exists (as in the case of the US, UK, Latvia, Ireland, Spain, Lithuania and so on) should come as no surprise.

These optimistic appraisals should be immediately dismissed on the grounds that they are completely predictable and thus tell us no new information about how the market is really performing, on much the same basis that politicians reflexively inform us they always have our best interests at heart.

In the US, the leading spruiker was David Lereah, the former chief economist of the National Association of Realtors. He championed rising housing prices, denied a bubble existed and cited sound fundamentals in the form of a housing shortage, demographic change and low interest rates. He published the book Why the Real Estate Boom Will Not Bust: And How You Can Profit From It at the peak of the bubble in early 2006.

Lereah has claimed that NAR executives pressured him into fabricating optimistic forecasts – something any skilled professional ought to have the capacity to resist.

Potential home buyers rely upon agents as the primary source of market information and place a high degree of confidence in them. Never mind agents operate for their paymasters – sellers – and are constantly working to remove buyer resistance to close the price gap to seller expectations. Sellers, however, are also affected by the perverse set of incentives that agents operate under.

Given their institutional bias toward spruiking, it is problematic that agents and RE organisations can make outrageous assertions about the investment potential of both the RE market and individual properties without bearing responsibility if things turn sour. Their “conversations” with buyers are deniable in a court of law.

Financial advisors are regulated by Australian Securities and Investment Commission (ASIC) and must meet strict guidelines. Anyone providing investment advice without a licence is subject to serious penalties if apprehended. A different standard applies to RE agents who can endlessly spruik million-dollar assets (homes) without a license.

The information asymmetry between buyers and industry is enormous. Atomised buyers rely on the advice dispensed by multi-million dollar organisations and multi-billion dollar sectors with a direct interest in maintaining the status quo of overvalued multi-trillion dollar property markets. These include the central bank, Treasury, commercial lenders, investment banks, RE intelligence firms and agencies, mass media outlets, governments, and the vast array of professionals employed in these sectors.

When real estate bubbles burst, the industry PR machine goes into overdrive, placing blame on everyone except themselves. Apparently, the poor have cheated the banks and RE agencies by refusing to keep up with mortgage payments, running rings around the oppressed sectors of power and privilege. (As Ayn Rand put it, America’s persecuted minority is big business.)

The mass media is heavily reliant upon advertising revenue from the RE industry, thus gagging outlets from speaking out against the interests of industry. Industries can and do use the threat of withdrawing advertising revenue to change editorial lines. Agents’ organisations depend heavily on journalists and editors casting the industry in a good light to maintain their supposed ability to self-regulate. This is similar to believing the nice, furry fox will guard the chicken coop – after all, real estate institutes represent agents, not consumers.

The incentives faced by the mass media ensure overly positive outcomes for the RE industry and other sectors as well (finance, insurance, mining, government, etc.).

The industry desperately needs to have these conflicts of interest and incentives to deceive removed to ensure an efficient property market for both buyers and sellers.

Agents should be required to have the equivalent of a financial services license, and pass a rigorous course in ethical practices. Neil Jenman, an experienced Australian RE consumer advocate, has sought to tackle these conflicts with his system of approved agents who adhere to high standards of ethical and consumer practice (that is one of the reasons why Jenman is not well liked within mainstream industry).

Eliminating the causes of high housing prices that promotes a bloated RE industry is a must. To this end, ending lax lending standards by the banks and taxing land is a necessity (though in Australia it is a case of too little, too late).

Regulators and politicians have not tackled these conflicts of interest for two reasons. The first is the belief that privatization and deregulation is the way to go; that markets can often do a better job via self-regulation. Even if market advocates point out that problems still exist, the second reason rears its head: the RE lobby is immensely powerful, representing the $4 trillion landowning class. The lobby will ensure that little will be done about the current state of affairs.

Given the inherent difficulties of such a task due to entrenched vested interests, a cynic may conclude it would be easier to clean up Chernobyl.


  1. DavidSB19-03-2012

    Beautifully written Mr. Soos. However it is never too late to implement Justice. Collecting the Site Value of Land (or the Land Value Tax as we know it) would be an excellent step toward this. We know that even the threat of such a tax will cause land price to fall; and that would be to the benefit of the vast majority of people.

    Corruption! It pervades every aspect of our society. Its influence is so subtle that one must express amazement that the market still operates. (Mother Nature will find a way?) Chernobyl? Surely you meant Fukishima? A typical example of what is told and what is not told.

  2. Duncan19-03-2012

    Markets do self-regualte however when the market is artifically modified like interest rates via the RBA and the modification of tax on asset classes such as primary or loss making investment properties it fails.

    The more debt that’s taken on should increase the risk and interest rates on both sides of the deal however the RBA has a “target inflation rate” of 2-3%, you would think they missed the lesson on compound interest being expotential.

    I’m surprised at the number of people that tout land tax as the solution to the cost of shelter but fail to associate that taxing income and profits is taxing productivity.

    While land tax falls out of that group, certainly you don’t want to be 90 years old and have 30 years of land tax inflation to pay when your income has been doing the opposite?

  3. Harold19-03-2012

    Of the 8 friends and aquaintances of mine who have
    bought, then sold property within the last 5 years,
    Losses range from $2000 (plus stamp duty,agents fees
    etc) to $60,000 (plus costs).
    I refuse to believe that this group of people are an
    Sometime, somehow, the veil of lies,deception and
    misinformation surrounding the real estate industry
    must be lifted, and the public be told the truth!

  4. Not MacroBusiness19-03-2012

    “Agents should be required to have the equivalent of a financial services license, and pass a rigorous course in ethical practices.”

    What rot! Do car salesmen need a financial services license to sell you a car? Does the baker need a financial services license to see you a loaf? Why should a real estate agent need a financial services license to sell you a house.

    Do your own research! You research cars before you buy a car. Well, research houses before you buy a house. It’s not that hard.

  5. Cracker19-03-2012

    Thanks Phillip,
    I don’t see how more regulation on RE agents will make any difference. Surely you don’t believe that agents have any influence over buyers intentions to buy? I would expect the buyer has well and truly decided to buy prior to meeting an agent? The agent merely negotiates the sale between two willing parties. Too much intervention from government is what’s kept the bubble expanding. How about addressing the real issues like stimulus and negative gearing?

  6. Wake Up20-03-2012

    Not Macrobusines – do people invest their life savings or take out a 25 year loan or hope they will be financially secure by buying a car or a loaf or bread? Wake up son. Your ignorance is showing.

  7. Nexus78920-03-2012

    Not Macrobusiness – If people are going to give advice then they should have some understanding of the industry they work in. More importantly they should be held to account for giving poor or manipulated advice. This is sadly lacking as sprukers have been able to weave fairly tales, profit from it and not be held responsible.

    Also intervention from government merely kept the property market from collapsing and pumped it up when it should have tracked down as happened in other countries. Modelling shows that the bubble has driven by bank debt availability, lax lending standards and poor land release. All of which is further distorted by negative gearing whereby investors have displace other types of buyers. Classical economic models (simpleton supply and demand) are hopeless are explaining bubbles.

    The whole thing is going to collapse like a pack of cards and take a lot of the economy with it as there is no much interlinked debt and government revenues based on property taxes. Housing policy in Australia has been a con underpinned by voodoo economics and set up to benefit a narrow set of interests.

  8. Not MacroBusiness20-03-2012

    Nexus and Wake Up, you both need to wake up. If you pair go to real estate agents for financial advice then you’re sillier than most bears. RE agents are not licensed to give financial advice. Their job is to sell houses for the best price they can achieve. If you want financial advice, go see a financial adviser. Real estate agents don’t give financial advice so it would be pretty stupid to require them to have a financial services license. Saying it’s a good time to buy is no more ‘financial advice’ than the barber telling to it’s a good time to get a haircut or a car salesman telling you it’s a great time to buy a car. If you dummies take ‘financial advice’ like that seriously, then there is no home for you and you deserve to be scammed for every penny!

  9. Bernie Kroczek20-03-2012

    I’ve never heard such biased, bitter rot in my 26 years operating as a real estate agent. Sellers willingly sell and buyers willingly buy. The agent is the mediary between the two parties. The agent no more influences values than does the private seller. If agents were able to influence values how come the median price of a house in Perth has dropped from $505,000 in 2006 to $450,000 today? Landgate in WA reports that turnover since 2006 has dropped by 40%. If real estate agents get paid on turnover why would they deliberately seek to reduce their source of income? You are getting spruikers ie develpoers selling their over priced developments, with real estate agents. In a free market economy the consumer dictates the price of goods and services, except in the case of multi national cartels such as Woolworths and Coles where there is very little choice for the consumer. Do your homework and let go of your bitter predjuices against real estate agents who are providing a service to a willing consumer. Your credibility is shot to pieces by the extreme bias in this article.

  10. Steven Shaw20-03-2012

    I’m surprised that Soos doesn’t mention the government’s own self-interest. A big problem has been the boon the state governments have received in transfer/stamp duties. These governments have gotten used to this “income” and it’s hitting the skids if I hear correctly. Local councils love a property boom to as it must process dramatically more “developer approval” requests. Haven’t worked out if the federal government benefits directly but everybody loves a boom – incomes increase and all that money sloshing around surely ends up in the federal government coffers too :).

  11. kika21-03-2012

    i was disappointed to see your glowing references to neil jenman.

    i worked for a short time in a jenman r.e. office, until i realised what a sham it was. the ‘jenman system’ is no more than american high-pressure selling operating under the guise of being ‘ethical’. rot. it is the usual rip-off, with real estate employees expected to behave like robots, quoting only the approved jenman phrases to their unfortunate customers.

    jenman makes millions with his “ethical” system, and he has fooled the media as well. they portray him as the good guy.

    please do some research and stop promoting him.

  12. Alex Barton (Astroturfer)23-07-2012

    Comments above from Not Macrobusiness are associated with Australian Property Forum – a suspected Astroturfing Operation for undisclosed property interests.

    You can read more about the fictional APF administrator here:


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