Conveyancing Services Regulation in Europe
Presentation at DG-Competition: “The Economic case for professional services
reform”
December 13, 2006
by
Christoph U. Schmid (ZERP, University of Bremen)
Gabriel S. Lee and Steffen Sebastian (IREBS, University of Regensburg)
Marcel Fink and Iain Paterson (IHS, Vienna)
Objectives
• To analyze the relationship between professional legal fees
and legal systems for real estate markets
Percentage of Legal Fees to House Value
PTV 250K Vs Regulation Indices
4.5
R2 = 0.30
R2 = 0.48 without HU
4
HU
GR
3.5
3
PL
2.5
2
Actual
Predicted Value
values
IT
Notary
1.5
SL
FR
BE
1
Nordic
FI
0.5
SE
DK
IR
Lawyer
Netherlands
CZ
SC
ES
AT
DE
NL
EW
0
0
2
4
6
8
10
12
14
16
Regulation Index = MERI + MCRI + MII
18
20
Objectives
PTV 250k Vs Regulation Indices by Legal Systems
1.80%
R2 = 0.75
1.60%
Percentage of Legal Fees to House Value
Notary
1.40%
1.20%
Lawyers
1.00%
Actual Values
Predicted Values
0.80%
Netherlands
0.60%
0.40%
Nordic
0.20%
0.00%
0
2
4
6
8
10
Regulation Index = MERI + MCRI + MII
12
14
16
Objectives
• German Case Study:
• To empirically analyze entry effects on competitive
conduct (markups) of notary profession in Bavaria,
Germany.
• To estimate changes in markups of existing firms when
additional firm enters.
• To estimate changes in geographic coverage when
markups change.
Outline
• Regulation Indices
•
•
•
•
Market entry regulations (MERI)
Market conduct regulations (MCRI)
Mandatory Intervention Index (MII)
Consumer Protection Index (CPI)
• Market Outcomes: Transaction Costs
• Legal Costs
• Regulation Indices and Market Outcomes
• German Case Study: Bavarian Notary Profession
Regulation Indices
• Qualitative information on regulation in form
of quasi-quantitative measures.
• Four regulation indices for each state and
each profession providing legal services
in the conveyancing process.
• Each index has a range of “0” (no regulation)
to “6” (highest grade of regulation).
Regulation Indices
• Market entry regulations (MERI)
• Quotas or economic needs tests (50% weight)
• Licensing rules (exclusive and shared exclusive
tasks) (25% weight)
• Professional education requirements (25% weight)
Regulation Indices
• Market conduct regulations (MCRI)
• Rules on fees/prices (50% weight)
• Location and diversification, on form of business, and
on inter-professional co-operation (each 11%: 33%
total weight)
• Restrictions on advertising (17% weight)
Regulation Indices
• Mandatory Intervention Index (MII)
• “0”, if no mandatory intervention applies
• “2”, if a mandatory intervention is necessary for a
certification of signatures only
• “4”, if further tasks have to be handled by one
professional in the conveyancing process on a
mandatory basis
• “6”, if more than one professional have to be
consulted
Regulation Indices
• Consumer Protection Index (CPI)
• “Compulsory indemnity insurance” the highest weight
(38%)
• Conduct/quality control (25%)
• Continuing education (25%)
• The obligation to provide services (12%)
Regulation Indices
Overall regulation indices for legal services in conveyancing: four
“worlds of regulation”
Group
MERI
Market
Entry
MCRI
Market
Conduct
MERI
+MCRI
18,0
15,0
14,7
14,3
14,3
14,2
14,1
14,0
11,9
11,0
14,1
CPI
Consumer
Protection
2,6
3,0
4,5
3,0
5,3
5,3
6,0
4,5
5,3
6,0
4,5
4,0
4,0
7,1
7,1
6,0
6,0
5,6
7,4
2,9
2,7
4,6
4,0
0,0
0,0
0,0
1,0
9,6
7,4
2,9
2,7
5,6
3,5
4,1
5,3
4,3
4,3
2,8
1,2
1,1
1,7
0,0
0,0
0,0
0,0
2,8
1,2
1,1
1,7
3,8
4,5
5,3
4,5
N
Greece
Portugal
Belgium
Poland
France
Germany
Italy
Spain
Slovenia
Austria
Average
6,0
5,0
5,7
5,6
5,1
5,7
5,4
4,8
4,9
5,9
5,4
6,0
6,0
5,0
4,7
5,2
4,5
4,7
5,2
5,0
3,2
4,9
12,0
11,0
10,7
10,3
10,3
10,2
10,1
10,0
9,9
9,0
10,3
D
Netherlands
Average
1,9
1,9
1,2
1,2
3,1
3,1
L
Hungary
Czech Republic
Scotland
England/Wales
Average
3,3
3,8
1,9
2,0
2,7
2,3
3,6
1,0
0,7
1,9
S
Denmark
Sweden
Finland
Average
2,0
1,2
0,5
1,2
0,8
0,0
0,7
0,5
MII
MERI
Mandatory
+MCRI
Intervention MII
6,0
4,0
4,0
4,0
4,0
4,0
4,0
4,0
2,0
2,0
3,8
Market Outcomes: Transaction
Costs
• Total Transaction Costs (nominal)
• EU average: 9.8% of 250k€ property value
• 3% - 7% : Czech Repulic, Denmark, England, Ireland, Scotland,
Slovenia and Sweden
• 7% - 10% : Finland, Germany, Italy and the Netherlands
• 10% - 15% : Austria, France, Hungary and Poland
• 15% above : Belgium, Greece and Spain
Market Outcomes: Transaction
Costs
• Professional Fees (nominal)
• EU average: 4.62% of 250k€ property value
• 1% - 3% : England, Ireland, Scotland, Poland and the
Netherlands
• 3% - 5% : Begium, Czech Repulic, Denmark, Finland, Germany,
Slovenia, and Sweden
• 5% - 9% : Austria, France, Greece, Hungary, Italy, and Spain
Market Outcomes: Transaction
Costs
• Legal Fees (nominal)
• EU average: 0.79% of 250k€ property value
• 0% - 0.4% : Czech Republic, Denmark, Finland and Sweden
• 0.4% - 1.0% : Austria, England, Germany, Hungary, Ireland, the
Netherlands, Poland, Scotland, Slovenia, and Spain
• 1.0% and above : Belgium, France, Greece, and Italy
Market Outcomes: Transaction
Costs
Legal Fees for Conveyancing
(including 100% mortgage)
(excluding Greece)
7,000 €
6,000 €
5,000 €
4,000 €
3,000 €
2,000 €
1,000 €
k
ar
d
D
en
m
la
n
Fi
n
ed
en
Sw
ly
Ita
um
Be
lg
i
nc
e
Fr
a
st
ria
Au
ai
n
Sp
ia
en
Sl
ov
an
y
m
G
er
la
nd
ic
i
(s
ol
ga
ry
Po
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r
)
d
an
Ire
l
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d
Sc
ot
la
gl
an
En
ch
un
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H
C
N
et
R
he
ep
rla
ub
lic
nd
s
0€
100,00 €
250,00 €
500,00 €
average transaction price (for the respective country)
indexed fee for average transaction (price index)
Market Outcomes: Transaction
Costs
Comparison of legal fees (Unadjusted)
by regulatory system
3,500 €
3,000 €
2,500 €
Nordic
2,000 €
lawyer
1,500 €
Netherlands
1,000 €
notary
500 €
0€
100,000 €
250,000 €
500,000 €
Market Outcomes: Transaction
Costs
Legal fees as percentage of transaction value (unadjusted)
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
100,000 €
250,000 €
500,000 €
England
France
Germany
Italy
Netherlands
Poland
Scotland
Spain
Sweden
Finland
Market Outcomes: Transaction
Costs
Percentage of Legal Fees to House Values (Adjust for net
income effect)
Legal Fees Adjusted by Net Earning factor for Selected Countries
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
100,000 €
250,000 €
500,000 €
House Values
England
Italy
Sweden
France
Poland
Netherlands
Germany
Spain
Finland
Market Outcomes: Transaction
Costs
Percentage of Legal Fees to House Values (adjusted for net income
effect)
Legal Fees Adjusted by Net Earning Factor by Legal Systems
3.00%
2.50%
2.00%
Nordic
Lawyer
Netherlands
Notary
1.50%
1.00%
0.50%
0.00%
100k
250k
House Values
500k
Legal Fees and Regulation Index
Legal Fee as Percentage of Average Country-specific
Residential House/Apartment Price
- by Countries
R2 = 0.2363
Percentage of Legal Fees to Aaverage House Price
3.5%
GR
3.0%
2.5%
HU
IT
2.0%
BE
1.5%
DK
1.0%
FR
SC
NL
FI
AT
SI
CZ
0.5%
SE
ES
DE
PL
EW
0.0%
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Regulation Index = MERI + MCRI + MII
16.0
18.0
20.0
Legal Fees and Regulation Index
• The result of this analysis is straightforward:
• A clear positive correlation between the level of regulation and
the percentage of transaction value taken by legal fees.
• There are some countries with high regulatory indices and
rather low cost percentage values (ES and DE).
• BUT, no countries with low regulatory index values and
high costs.
Legal Fees and Regulation Index
Legal Fee as Percentage of Average Country-specific
Residential House/Apartment Price
- by Legal System
R2 = 0.9028
Percentage of Legal Fees to Aaverage House Price
1.6%
Notary
1.4%
Lawyer
1.2%
1.0%
Netherlands
0.8%
Nordic
0.6%
0.4%
0.2%
0.0%
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Regulation Index = MERI + MCRI + MII
14.0
16.0
Legal Fees and Regulation Index
• The correlations between the regulation indices and legal
systems.
• The relationship between the two variables is even closer: the
correlation values are 0.75, 0.84 and 0.91 for the house values
of 100k, 250k and 500k.
Case study for Germany: Entry and Competition for
Bavarian Notary Profession
By Gabriel S. Lee
Objective
To empirically analyze entry effects on competitive
conduct (markups) of notary profession in Bavaria,
Germany.
• To estimate changes in markups of existing firms when
additional firm enters.
• To estimate changes in geographic coverage when
markups change.
Bavarian Notary Profession
Number of notaries per District
Number
of
Notaries
Number
of
Districts
0
1
2
3
4
5
6+
Total
12
22
25
21
8
5
3
96
• Geographic restrictions
• Additional notary office is based on previous number of
cases + other demographic and economic factors
What is an Entry Model?
• Relates the number of existing notaries to
demographics (population size) and other
economic factors (income, unemployment,
demographic profile, housing information.
– If population size is a proxy for the market size, then
one could measure the necessary market size (a
reduction in net markups) to sustain an additional firm
entry.
Data Information
Variable
Description
Mean
Std. D.
# notaries
Number of notaries per district
2.60
4.36
ln(population)
Logarithm of number of population
11.59
0.53
% pop. 25 – 40
Fraction of population age between 25 - 40
19.90
1.46
% unemployed
Fraction of population between 17 and 65, that is unemployed
8.56
3.01
% change in Houses
Percentage change in the number of houses between 1995 and
2003
11.02
3.72
mean income
Mean Income per capita (in €1000)
58.71
8.81
Data Information
600000
Correlation (notaries, population) = 0.86
500000
Number of Notaries
400000
300000
8
200000
100000
6
0
4
2
0
10
20
30
40
Number of Notaries
50
60
70
80
90
Population (market size)
Population (First Approximation of Market Size)
Number of Districts by population and notaries
Empirical Results
• Net Markup Changes for Existing Notary
Number of Existing Firms to
addional firm
Net Markup Lose to Existing Firms
1 to 2
53%
2 to 3
78%
3 to 4
116%
4 to 5
75%
5 to 6
186%
Empirical Results
• Geographic Coverage with reduction in markups
Reduction in Net Markup for
Existing Firms
Total Number of Districts with at
Least one notary
82 (Actual number from the data)
10%
90
20%
88
30%
87
40%
81
Summary of our results
• A clear positive correlation between the level of
regulation and the percentage of transaction
value taken by legal fees
• High levels of regulation go hand in hand with high fee levels
whereas low levels of regulation are associated with low fee
levels.
• For Bavaria,
• There exist high net markups for the existing firms: from 53% 186%
• No negative effect on the geographic coverage even if there is a
reduction in net markups.
Some Final Remarks
• Market works! Why not give it a try!
• There still plenty of profits to be made even with
competition
• Instead of markups, why not go for Volume!
• Frictions in any market can’t be good
• Reductions in transaction costs play a major role in the development
of real estate markets as well as the whole economy
• See the U.S., U.K.
Thank you !
Back ups
Show these if necessary
Total Transaction Costs for Conveyancing
250,000 € sale price
50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
Austria
Czech
Republic
England
France
real estate agent
Greece
technical services
Ireland
legal professionals
Netherlands
land register
Scotland
transfer tax
Spain
average
Professional fees for transaction of 250,000 €
25000
20000
15000
10000
5000
0
Austria
Czech
Republic
England
France
real estate agents
Greece
Ireland
technical services
Netherlands
legal professionals
Scotland
Spain
average
Market Outcomes: Transaction
Costs
Legal Fees for Conveyancing
(including 100% Mortgage)
14,000 €
12,000 €
10,000 €
8,000 €
6,000 €
4,000 €
2,000 €
ar
k
m
d
D
en
la
n
Fi
n
G
re
ec
e
Sw
ed
en
ly
Ita
um
Be
lg
i
Fr
an
ce
a
st
ri
Au
Sp
ai
n
en
ia
Sl
ov
an
y
m
G
er
la
nd
Po
ito
r)
nd
(s
ol
ic
la
H
un
ga
ry
Ire
nd
Sc
ot
la
gl
an
d
En
ep
R
ze
ch
C
N
et
he
rla
ub
lic
nd
s
0€
100,000 € transaction value
250,000 € transaction value
500,000 € transaction value
average transaction value in this country
Market Outcomes: Transaction
Costs
Development of Legal Fees for Selected Countries (Unadjusted)
7,000 €
6,000 €
5,000 €
Netherlands D
England L
Scotland L
Germany N
Spain N
France N
Italy N
Sweden S
Poland N
Finland S
4,000 €
3,000 €
2,000 €
1,000 €
0€
100,000 €
250,000 €
500,000 €
Legal Fees and Regulation Index
PTV100k Vs Regulation Index
12.00
R2 = 0.10
R2 = 0.38 without HU
10.00
Percentage of Legal Fees to House Value
HU
8.00
Actual Values
Linear (Actual Values)
6.00
GR
4.00
IT
PL
2.00
FI
SE
SL
DK
IR
SC
EW
BE
FR
ES
DE
CZ
AT
NL
0.00
0
2
4
6
8
10
12
14
Regulation Index = MERI + MCRI + MII
16
18
20
Legal Fees and Regulation Index
PTV 250K Vs Regulation Indices
4.5
R2 = 0.30
R2 = 0.48 without HU
4
HU
Percentage of Legal Fees to House Value
GR
3.5
3
PL
2.5
Actual values
Predicted Value
2
IT
1.5
SL
FR
BE
1
DK
IR
0.5
FI
SE
ES
DE
AT
CZ
NL
SC
EW
0
0
2
4
6
8
10
12
Regulation Index = MERI + MCRI + MII
14
16
18
20
Legal Fees and Regulation Index
PTV 500k Vs Regulation Indices
4
R2 = 0.34
GR
Percentage of Legal Fees to House Value
3.5
R2 = 0.42 without HU
3
HU
2.5
Actual Values
Predicted Value
2
PL
1.5
IT
FR
1
SL
BE
IR
0.5
SC
FI
SE
0
0
2
AT
NL
CZ
DK
DE
ES
EW
4
6
8
10
12
Regulation Index = MERI + MCRI + MII
14
16
18
20
Legal Fees and Regulation Index
PTV 100k Regulation Indices for Legal Systems
3.00%
Notary
R2 = 0.75
Percentage of Legal Fees to House Values
2.50%
2.00%
Laywer
Actual Values
Predicted Values
1.50%
Nordic
Netherlands
1.00%
0.50%
0.00%
0
2
4
6
8
10
Regulation Index = MERI + MCRI + MII
12
14
16
Legal Fees and Regulation Index
PTV 250k Vs Regulation Indices by Legal Systems
1.80%
R2 = 0.75
1.60%
Percentage of Legal Fees to House Value
Notary
1.40%
1.20%
Lawyers
1.00%
Actual Values
Predicted Values
0.80%
Netherlands
0.60%
0.40%
Nordic
0.20%
0.00%
0
2
4
6
8
10
Regulation Index = MERI + MCRI + MII
12
14
16
Legal Fees and Regulation Index
PTV 500k Vs Regulation Indices by Legal Systems
0.90%
R2 = 0.91
Notary
Percentage of Legal Fees to House Value
0.80%
0.70%
0.60%
Lawyers
0.50%
Actual Values
Predicted Values
0.40%
Netherlands
0.30%
0.20%
Nordic
0.10%
0.00%
0
2
4
6
8
10
Regulation Index = MERI + MCRI + MII
12
14
16
3500
3000
2500
2000
Nordic
law yer
Netherlands
1500
notary
1000
500
0
100.000 €
250.000 €
500.000 €
average price
adjust ed
absolut f ee
price level
Back Ups
Legal Fees for Different Legal Systems
3500
3000
2500
2000
Nordic
law yer
Netherlands
1500
notary
1000
500
0
100.000 €
250.000 €
500.000 €
average price
adjust ed
absolut f ee
price level
Back Ups
Legal Fee as Percentage of Average Country-specific
Residential House/Apartment Price
- by Countries
R2 = 0.2363
3.5%
GR
3.0%
PTV-AHP
2.5%
HU
IT
2.0%
BE
1.5%
DK
FR
SC
1.0%
NL
FI
AT
SI
CZ
0.5%
SE
ES
DE
PL
EW
0.0%
0.0
2.0
4.0
6.0
8.0
10.0
12.0
3M = MERI + MCRI + MII
14.0
16.0
18.0
20.0
Back Ups
Legal Fee as Percentage of Average Country-specific
Residential House/Apartment Price
- by Legal System
R2 = 0.9028
1.6%
Notary
1.4%
Lawyer
1.2%
PTV-AHP
1.0%
Netherlands
Nordic
0.8%
0.6%
0.4%
0.2%
0.0%
0.0
2.0
4.0
6.0
8.0
10.0
3M = MERI + MCRI + MII
12.0
14.0
16.0