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Analyzing Professional Legal Fees and Real Estate Market Regulations in Europe

Explore the correlation between professional legal fees and real estate market regulations in Europe, with a focus on the German case study regarding notary entry effects and competitive conduct.

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Analyzing Professional Legal Fees and Real Estate Market Regulations in Europe

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  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 PTV 250K Vs Regulation Indices 4.5 R2 = 0.30 R2 = 0.48 without HU 4 HU GR 3.5 3 Percentage of Legal Fees to House Value PL 2.5 Actual values Predicted Value 2 IT 1.5 SL FR BE 1 DK IR ES AT CZ 0.5 FI DE SC NL EW SE 0 0 2 4 6 8 10 12 14 16 18 20 Regulation Index = MERI + MCRI + MII • To analyze the relationship between professional legal fees and legal systems for real estate markets Notary Lawyer Nordic Netherlands

  3. Objectives

  4. 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.

  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. 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 notary 1,000 € 500 € 0 € 100,000 € 250,000 € 500,000 €

  17. 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

  18. Market Outcomes: Transaction Costs Legal Fees Adjusted by Net Earning factor for Selected Countries 3.50% 3.00% 2.50% 2.00% Percentage of Legal Fees to House Values (Adjust for net income effect) 1.50% 1.00% 0.50% 0.00% 100,000 € 250,000 € 500,000 € House Values England France Germany Italy Poland Spain Sweden Netherlands Finland

  19. Market Outcomes: Transaction Costs Legal Fees Adjusted by Net Earning Factor by Legal Systems 3.00% 2.50% 2.00% Nordic Percentage of Legal Fees to House Values (adjusted for net income Lawyer effect) 1.50% Netherlands Notary 1.00% 0.50% 0.00% 100k 250k 500k House Values

  20. Legal Fees and Regulation Index

  21. 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.

  22. Legal Fees and Regulation Index

  23. 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.

  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 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

  29. Data Information

  30. Empirical Results • Net Markup Changes for Existing Notary

  31. Empirical Results • 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 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.

  34. Thank you !

  35. Back ups Show these if necessary

  36. Market Outcomes: Transaction Costs

  37. Market Outcomes: Transaction Costs Development of Legal Fees for Selected Countries (Unadjusted) 7,000 € 6,000 € 5,000 € Netherlands D England L Scotland L 4,000 € Germany N Spain N France N Italy N 3,000 € Sweden S Poland N Finland S 2,000 € 1,000 € 0 € 100,000 € 250,000 € 500,000 €

  38. Legal Fees and Regulation Index

  39. Legal Fees and Regulation Index

  40. Legal Fees and Regulation Index

  41. Legal Fees and Regulation Index

  42. Legal Fees and Regulation Index

  43. Legal Fees and Regulation Index

  44. Back Ups Legal Fees for Different Legal Systems

  45. Back Ups

  46. Back Ups

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