Collusion on commissions threatens property market

Secondhand home buyers in Shanghai will face greater uncertainty when their realty agencies charge them commissions.

On Sunday, the Shanghai Municipal Development and Reform Commission, the city's economic planner, will lift the maximum limit on commissions that real estate agencies can charge their clients.

At present, agencies can charge the buyer and seller each up to 1 percent of the sale price, though in practice the buyer covers the entire commission. So, for an average two-bedroom apartment downtown that sells for 4 million yuan ($640,409), the buyer will have to pay 80,000 yuan in commissions. It's a large expense for most residents.

Last August, 13 of the city's real estate agencies, including the largest and best known, formed an alliance to lobby the government to raise the ceiling on commissions to 3 percent in total.

Last month, the commission announced it would remove the ceiling. Clearly, with the government's efforts at reducing the number of pricing controls, the change aims to leave real estate commission rates in the hands of the market.

Earlier this month, the Shanghai Real Estate Trade Association reiterated that lifting the ceiling doesn't mean agencies can demand any commission they please. The association said that it had forbidden agencies from colluding on commission rates.

This self-regulation, however, doesn't guarantee that home buyers won't get gauged. Many have started to worry that they will have to pay more to buy a home.

Their concerns are warranted. In July, Tianjin increased its ceiling on real estate commissions. A month later, the city's major realtors raised the standard commission for both parties from 2 percent to 3 percent - a 50 percent increase that home buyers had difficulty swallowing.

The fact is that the major realtors control most of the secondhand property market. They also control most of the information about the market, making it difficult for smaller agencies to compete.

There was a large enough public outcry in Tianjin that the government had to step in and begin an investigation into whether the major realtors were engaged in price fixing.

The situation is similar in Shanghai. Brand-name realty chains control much of the market. With so much control held in the hands of so few agencies, there's a good chance they could raise commission rates.

Although smaller agencies might be able to offer lower rates to their clients, they didn't have access to the same amount of market information as their larger competitors, making it difficult for them to shift the market.

Online agencies have also been trying to win market share with lower commissions. They charge buyers and sellers each a 0.5 percent commission for secondhand homes. However, they have failed to attract many clients due to their reputation for engaging in shady business practices, such as posting false property information.

Given the reality, the city's authorities can do more than just remove the ceiling on commission rates. When the government considers a policy change in a given industry, it first needs to thoroughly research that industry and its market.

A few large players dominate Shanghai's secondhand property market. Now that they have formed an alliance to bargain with the government to hike the commission rate, the authorities should be well aware of the high risks of lifting the ceiling.

It's absolutely understandable that the government wants to reduce its interference in the market, but it also has the obligation to come up with measures to prevent companies from colluding on commission rates.