Jul 112016
 

Real Estate Incentives

Financial advisors sometimes get a bad reputation for not having their client’s best interest in mind. Many continue to earn commissions even if their client’s portfolio is losing money. But what about real estate agents? Their compensation structure is also heavily based on commissions. They often earn a percentage from the final sale of a home. For a homeowner looking to sell, the ideal situation is to sell his house for the highest price possible. So at first glance it would appear that both a homeowner and a real estate agent would have the same financial incentive; to get the best possible deal for the seller. ūüôā

mics-house

But further investigation reveals that maybe that’s not really true. Let’s say a homeowner¬†sells his house for $500,000 with the help of a real estate agent on a fixed 2% commission. This means the realtor earns $10,000 and the homeowner keeps the remaining $490,000. To keep it simple we’ll ignore taxes and other costs.

But maybe¬†with some additional¬†advertising, negotiations, and patience, the house could actually be sold for $510,000. But this is when the¬†incentive structures begin to diverge. As the homeowner selling the house, an extra $10,000 from the sale price means adding $9,800 more to the bank. ūüėÄ Most sellers would like to see that money, even if it means waiting an extra couple of weeks to find the right buyer. But a realtor would only make $200 off the extra $10,000. For most real estate agents, putting in the extra time and effort (and sometimes even money for ads) isn’t worth the extra commission. So if the homeowner stands to gain $9,800 while the agent would only receive $200, then clearly their incentives do not align very well anymore.

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Jul 162015
 

Earlier this year a Vancouver house with a $5 million assessed value was put on the market for¬†$6 million. Guess how much it ended up selling for? Hint, it’s in the upscale Shaughnessy neighbourhood. ūüôā

15-07-8-million-vancouver-home-rate-cut

After 12 days and multiple bids from 10 prospective buyers the 78 year old¬†home was sold for $8 million, lol. Welcome to Vancouver. You’re welcome to buy a house¬†here, as long as you’re willing to pay $2 million over the asking price. ūüėõ

Our hot real estate market is about to get¬†even more extreme because yesterday morning¬†the Bank of Canada announced another 0.25% rate cut.¬†Holy pumpernickel! Now it will be even harder to raise rates in the future without pricking the bubble.¬†📌

The Effects of the Rate Cut¬†‚úā

The overnight lending rate was lowered to 0.5% in an attempt to boost capital expenditure and drive companies to spend more on hiring and manufacturing. However this will also unintentionally persuade already heavily indebted consumers to take on even more debt.

The problem with monetary policy is that it affects the entire country even though places like Vancouver really don’t need any further easing of credit.¬†A better solution would have been to address the faltering economy in some parts of Canada, like Alberta, using targeted fiscal policy instead of a blanket rate cut. But that’s just my personal opinion.

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