1. 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)

2. Objectives To analyze the relationship between professional legal fees and legal systems for real estate markets Nordic Lawyer Netherlands Notary

3. Objectives

4. 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.

5. 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

6. 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).

7. 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)

8. 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)

9. 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

10. 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%)

11. Regulation Indices Overall regulation indices for legal services in conveyancing: four worlds of regulation

12. 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

13. 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

14. 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

15. Market Outcomes: Transaction Costs

16. Comparison of legal fees (Unadjusted) by regulatory system 0 500 1,000 1,500 2,000 2,500 3,000 3,500 100,000 250,000 500,000 Nordic lawyer Netherlands notary

17. Market Outcomes: Transaction Costs

19. Legal Fees Adjusted by Net Earning Factor by Legal Systems 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 100k250k500k House Values Percentage of Legal Fees to House Values (adjusted for net income effect) Nordic Lawyer Netherlands Notary

20. Legal Fees and Regulation Index

21. 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.

22. Legal Fees and Regulation Index

23. 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.

24. Case study for Germany: Entry and Competition for Bavarian Notary Profession By Gabriel S. Lee

25. 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.

26. Bavarian Notary Profession Number of Notaries 0123456+Total Number of Districts1222252185396 Number of notaries per District Geographic restrictions Additional notary office is based on previous number of cases + other demographic and economic factors

27. 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.

28. Data Information VariableDescriptionMeanStd. D. # notariesNumber of notaries per district2.604.36 ln(population)Logarithm of number of population11.590.53 % pop. 25 – 40Fraction of population age between 25 - 4019.901.46 % unemployedFraction of population between 17 and 65, that is unemployed8.563.01 % change in Houses Percentage change in the number of houses between 1995 and 200311.023.72 mean incomeMean Income per capita (in 1000)58.718.81

29. Data Information

30. Empirical Results Number of Existing Firms to addional firm Net Markup Lose to Existing Firms 1 to 253% 2 to 378% 3 to 4116% 4 to 575% 5 to 6186% Net Markup Changes for Existing Notary

31. Empirical Results 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 Geographic Coverage with reduction in markups

32. 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.

33. 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 cant 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.

34. Thank you !

35. Back ups Show these if necessary

38. Market Outcomes: Transaction Costs

40. Legal Fees and Regulation Index

47. Back Ups Legal Fees for Different Legal Systems

48. Back Ups