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Real Property Transaction Costs in Slovenia
by Ilkka Mikkonen

The terms transaction and transaction costs are technical terms within economics. They relate to the fact that the cost of a commodity in a market not only reflects the price paid. The cost includes the efforts of searching for the relevant commodity and assessing the quality of the product, as well as the costs of legal protection of property rights (North, 1996). The costs of transfer of real property rights depend, among others, on the efficiency of public administration. Also formal rules like legislation and informal rules, for example cultural background, have an affect on these transaction costs.

Studies of transaction costs have been made. Table 1 summarises the findings of a desk study, commissioned by the UK department of the Environment, Transport and Regions to Barony Consulting. The figures do not include equivalents of stamp duty and VAT.

Table 1: Home buying costs as per cent of £ 50,000 property (before tax) (Office of the UK Deputy Prime Minister; Housing Research Summaries No. 77, 1998)

Country

Costs (%)

Australia

3

England and Wales

3

Sweden

5

Denmark

6

France

6

United States

6

South Africa

8

Portugal

10

Also Viitanen (2003) has made some calculations on the Finnish real property transaction costs. He assess that the transaction costs in Finland for a normal transaction involving a subdivided plot with a built-up one-family house are about 10 %. These costs are normally divided equally between the seller and the buyer. In Finland there were about 15 500 transactions in relation to one-family house real properties in 2003 (National Land Survey, 2004). The average purchase price of these transactions was 97 000 euros. So the rough estimation of transaction costs in these cases was almost 150 million euros per year.

Wallis and North (1986), measuring the size of transaction costs that go through the market in the U.S. economy found that more than 45 % of national income was devoted to transacting and, moreover, that this percentage had increased from approximately 25 % a century earlier.

The above findings support the need for a better understanding of this transaction costs area. In order to establish such proven understanding it is appropriate to restrict the field of study to selected European countries. This STSM report concentrates on the Slovenian and Finnish transaction costs in the field of real property.

Transaction Cost Theory
The base of the transaction cost theory is on new institutional economics. An economic explanation for the existence of firms and organizations can be found in transaction cost theory (TCE), originating with the argument of Ronald H. Coase that: “The main reason why it is profitable to establish a firm would seem to be that there is a cost of using the price mechanism” (Coase, 1937). TCE is prominently associated with Oliver E. Williamson, who explains the formation of hierarchies and the nature of the modern corporation chiefly in internalising transaction costs within the organization and thus saving on these costs. The transaction costs borne by parties in an exchange relationship result mainly from negotiating, monitoring and enforcing contracts and behaviours associated with the exchange. Transaction costs can be usefully thought of as “the economic equivalent of friction in physical systems”– as friction in the system of exchange. As friction absorbs energy and reduces the efficiency of a mechanical system, so transaction costs similarly reduce economic efficiency and the potential value of an exchange. (Williamson, 1991).

To give the model practical and operational value Williamson identified two human factors and three environmental factors as being responsible for transaction costs. The human factors, are opportunism and bounded rationality or the notion that people are essentially rational, but only limitedly so, because they do not have the ability to process all the information required to act rationally. The three environmental factors defined are uncertainty and complexity (frequency) and asset-specificity. (Williamson, 1985).

In the model, higher levels of environmental uncertainty and complexity, combined with bounded rationality, lift transaction costs as they make it more difficult for one party to monitor the other party’s performance. The existence of only a few traders in the market also increases transaction costs as it gives one party the chance to exploit the situation through opportunistic behaviour. However, it is the asset-specificity that is the major source of transaction costs. The more a party invests in specific assets dedicated to an exchange relationship e.g. specialised machinery, technology, software or skills etc, the lower the likelihood that the assets can be transferred to another relationship, and the higher the probability that the specific assets are worth considerably less in their second best use. (Williamson, 1985). In other words, the decision to make a specific investment on behalf of another party is a risky one, for the other party may act opportunistically and cheat by taking advantage of investor’s vulnerability, knowing that there are few buyers for the specialised assets, see picture 1.

Picture 1. Transaction cost framework

Transaction Costs to the Buyer and the Seller in Slovenia
In Slovenia a purchase of real property is an official legal act that must be done in a specific form. There are some compulsory fees for the buyer and the seller in purchase of real property. For example, the seller has to pay fees to the municipality, cadastral authority, cadastral surveyor (in the case of subdivision) and notary. He/she is also obliged to pay the transaction tax, which is 2 % of the purchase price. The buyer has to pay his part of the payments to the notary and also the registration fee for registering the new parcel to the land register. If the sale is made by a broker the seller and/or the buyer pays a commission to the broker, which is normally 4 % of the purchase price plus 20 % of the value added tax. This commission includes all the costs concerning the pre-emption right check, sale contract, verification and signature verification of the contract, except the payment of the transfer tax and fee for the new owner to the Land Register, see table 2.

Table 2. Transaction costs for the seller and the buyer in Slovenia (purchase price 20 000 €).

Transaction costs

Seller

Buyer

Total

Costs paid to the land surveyor

500

 

500

Fee to the Cadastral Authority

20

 

20

Fees to the Municipality

40

 

40

Broker (if used)

1 000

 

1 000

Notary

70

70

140

The transaction tax (2% of purchase price)

400

 

400

Fee to the Land Registry

 

80

80

Total

2 030

150

2 180

In Finland the buyer’s role in transaction costs is much bigger than in Slovenia. The subdivision of the plot is made after the transaction and the buyer has to pay the fees to the cadastral surveyor, see table 3.

Table 3. Transaction costs for the seller and the buyer in Finland (purchase price 20 000 €).

Transaction costs

Seller

Buyer

Total

Broker (if used)

1 000

 

1 000

Public purchase witness

40

40

80

The transaction tax (4% of purchase price)

 

800

800

Fee to the Land Registry

 

80

80

Fee and costs to Cadastral Authority(+surveyor)

 

1 000

1 000

Total

1 040

1 920

2 960

Institutions in Land Register System and Transaction Costs
Implementing a sound real estate policy requires well-managed real estate registers, which is one of the basic elements for the functioning of the real estate market and one of the primary conditions for successful transition to a market oriented economy. Uniform registration of real estate and high quality on real estate data are the basis for spatial management, the implementation of real estate policies, evaluation and taxation of real estate, recording of material rights to property, spatial specification of data, statistical statements and other related matters. (Lipej, 2002).

History of Land Cadastre and Land Register in Slovenia
Started in the years between 1823 and 1828 the first systematic cadastral survey was performed and cadastral plans in the scale of 1:2880 were produced. For the whole territory the ownership, land use and land classification was defined and so the value for property for taxation purposes was gained. Later the Land Register was established and dual property registration model legalised. (Brajnik, 2004).

The period of communist regime in ex Socialist Federative Republic of Yugoslavia leaves crucial consequences in land administration matters. The social system was not in favour of exact and complete real estate registration. Most property was social owned, private ownership and initiative was not popular. Land Cadastre and Land Register were in low accordance and generally in bad condition, renewal was very limited. Extreme backlogs and long waiting periods for land registration and alteration to cadastral data entries were normal facts. (Brajnik, 2004).

The new Slovenian constitution marked the way toward economic system change. Security of tenure becomes essential again. Problems of missed approach to land policy and bad real estate registration were easy to see. The processes of privatisation, denationalisation and a new investment cycle brought new aspects and needs in front of the surveyors and other related authorities. The situation was a challenge for quick and effective reorganisation of the Land Administration sector. (Brajnik, 2004).

Transition Process
Big errors and long waiting periods in the land registration processes were recognized as serious trouble for the new economic development. Different possibilities and different interests in different municipalities did result in a big difference in the cadastral maintenance, land registration and also in the transaction costs. The Central Surveying Authority was not in a position to take a lead and has small influence on the existing 46 Municipal Cadastral Offices. The desires and needs of society lead toward an effective Land Information System or even better Geographical Information System, where more spatial and other data would be connected in scope of better decision making. (Brajnik, 2004).

Three fundamental real estate records were defined; the Land Register, the Land Cadastre and the Building Cadastre, two of them in a bad condition and disharmonised because of the ex socialist era and the third, the Building Cadastre as new evidence to be set. On the basis of new Organization and Ministries Sphere of work Act and Administration Act the centralization of vital public services were performed 1995. Geodetic service became a competence of the state administration, the Surveying and Mapping Authority of the Republic of Slovenia (SMA) with the main office, 12 regional authorities and their 46 affiliates was established. As the legislation renewal was still in progress the Minister of Environment and Physical Planning issued the obligatory order on the implementation of geodetic services via private sector. The processes of registration were accelerated, backlogs in the cadastral maintenance practically compensated, but the data disharmony between the land cadastre (SMA) and the land register (district courts) remained problematic. (Brajnik, 2004).

The Geodetic Activities Act (2000) defined the surveying and mapping activity and determined the conditions for implementing this activity. A geodetic company or an independent entrepreneur that has been granted the permit to carry out geodetic services could only implement technical works and procedures in connection with geodetic service duties. The Land Register remained in competence of the district courts. (Brajnik, 2004).

Real Estate Registration Modernisation
The Modernization of Real Estate Records Management Project, a Slovene joint project implemented by the Supreme Court of the Republic of Slovenia and the Surveying and Mapping Authority of the Republic of Slovenia, financed mainly by PHARE donations, was concluded in 2001. The fundamental purpose of the project is to provide basic data on real estate and their ownership, to introduce new technologies, computerize real estate records and to bring the Slovenian legislation related to real estate management into line with the existing legislation of the EU Member States. Other objectives were to create a comparable and suitable legal, institutional and technical environment for modernising the management of the land register and land cadastre and to provide effective access to the land register and land cadastre data for government users and for the public. The project consisted of two parts: the institutional support for achieving a suitable technical and institutional environment and investments in the purchase of information equipment for modernising the land cadastre and land register management. The total value of the project was approximately 3 million euros, approximately 600,000 euros for institutional support, and approximately 2,400,000 euros for information equipment. (Lipej, 2002).

Operational Costs of Real Estate Institutions in Slovenia
It is quite difficult to calculate or assess the operational costs of the governmental institutions in Slovenia or anywhere. Usually the real estate service is hidden inside a wider public function. For example, this is the case for the land register in district courts. Its services related to the real estate market include mainly inheritance cases, neighbour, restitution, housing and similar cases, enforcement procedures involving real estate and land register. It is possible to provide rough estimate of the split of the courts budget based on the number of cases.

The budget of the courts amounts to 100 million euros. The courts solved 570 000 cases in 2003, and about the same amount is unsolved backlog. They did it with about 700 judges and 2200 employees. They solved about 24 000 inheritance cases, 14 000 diverse real estate cases, 6600 real estate enforcement cases and 220 000 land register cases (Ministry of Justice, 2004). To sum up, real estate cases amount to some 46 % of all cases. With the somewhat unrealistic assumption that they are as demanding as other cases, the budget for these cases would be 46 million euros. That would leave us with the rough estimate of 46 million euros spent on real estate court services or about 180 euros per case.

For comparison: in Finland the courts solved 779 586 cases in 2003, 486 389 of which were related to real estate issues. The total budget of the courts was almost 118 million euros in 2003; so the rough estimate of euros spent on real estate cases is about 73 million euros or 150 euros per case. (Ministry of Justice of the Republic of Finland, 2003).

It is easier when the whole of an agency can be attributed to real estate services, like the Surveying and Mapping authority of the Republic of Slovenia. Its budget was some 20 million euros in 2003, with some 550 employees and 20 000 km2 and some 5,1 million parcels to administer. (Surveying and Mapping Authority of the Republic of Slovenia, 2003).

In comparison the National Land Survey of Finland has 13 Land Survey Offices, its budget was 92 million euros in 2003, and there were about 1 825 employees. 72 % of the expenses went to salaries, 10 % to rents, 9 % services and 9 % to other expenses. The fees from the customers cover about a half of the budget, 45 % of the incomes came from private households, 30 % from the government, 17 % from the businesses and rest 8 % from other groups. (National Land Survey of Finland, 2004). Here we have to remember that in Finland the surveyors work under the state (National Land Survey of Finland) and in Slovenia the surveyors work in private companies. So it is not so easy to compare these two systems and their transaction costs.

Conclusions
The subject of the management of real estate records is among the most important activities in Slovenia in the past few years, and takes place simultaneously at several departments and in diverse institutional environments. The tasks are extensive and demand a high level of expert knowledge, cooperation and communication. Real estate records are an important element in the spatial data infrastructure, which supports the development of the land information systems and through this, contributes to more comprehensive decision making concerning the environment, balanced and sustainable development, and improved management of natural resources and acceleration of the economic development. The transition process continues and surely there are still some gaps to fill. For example, the cooperation and collaboration of the land cadastre and the land register authorities can be better; improving these data and the information flows will lead to decrease in the transaction costs.

When comparing the Slovenian and Finnish Gross Domestic Products it seems that the overall transaction costs in both countries are quite equal in normal real property transaction processes. But in the Slovenian system the transaction costs are higher to the seller and that may restrict or decrease his or her selling intensions. For example in the subdivision process, the seller is obliged to pay the whole subdivision process before the actual transaction. In Finland the system is opposite and the buyer pays the subdivision process after the transaction is completed. So my opinion is that the Finnish transaction system makes it easier to the seller to provide his/her real property in the real estate market.

When trying to calculate the transaction costs to the State one can find a lot of problems. It is quite difficult to find these costs in the institutional budget, or at least these calculations are very rough and only trend setting. Another problem is that the data is not comparable to other countries, because some of the state expenses could be covered in different way in different legal systems, for example the previously noted role of the surveyor in the Finnish and the Slovenian system. In the future research of this issue should concentrate on finding out a compatible way to compare these transaction costs to other countries.

References
Brajnik, Milan, 2004. Symposium on land administration in post conflict areas. Geneva, http://www.fig.net/commission7/geneva_2004/papers/lapca_08_brajnik.pdf.

Lavrac, Ivo, 2004. Towards national real estate accounts: the case of Slovenia. Riga, Meeting of the COST G9 action “Modelling Real Property Transactions” 7th WG and MC meeting.

Ministry of Justice of the Republic of Finland, 2003. Käräjäoikeuksien työtilastoja vuodelta 2003. Helsinki, 50 p.

National Land Survey of Finland, 2004. Kiinteistöjen kauppahintatilasto. Helsinki, Multiprint Oy: 66 p.

North, Douglas C., 1990. Institutions, institutional change and economic performance. Cambridge, Cambridge University Press: 147 p.

North, Douglas C and Wallis John Joseph, 1986. Measuring the Transaction Sector in the American Economy: 1870 to 1970 Long Term Factors in American Economic Growth. University of Chicago Press: 51 p.

Stuckenschmidt, Heiner, Erik Stubkjaer and Christoph Schlieder, 2003. The Ontology and Modelling of Real Estate Transactions. Aldershot, Ashgate publishers 186 p.

Lipej, Bozena, 2002. Slovenian state projects in the field of real estate registration. Washington, FIG XXII international congress, http://www.fig.net/pub/fig_2002/Ts7-3/TS7_3_lipej.pdf.

Williamson, Oliver E., 1985. The economic institutions of capitalism. London, The Free Press: 450 p.

Williamson, Oliver E. and Winter, Sidney G., 1991. The nature of the firm - origins, evolution, and development. New York, Oxford University Press. 235 p