edited talk delivered at REIDA 2018
I have 10 minutes, which is about enough to tell you a story that’s been going on for 10 years. This story begins in 2008 when a group of institutional investors was looking for a reliable data source needed to understand the riskiness of Swiss residential property investment over the long-run. At that time, none of the published indices for Switzerland were stretching back for more than 35 years.
It is with this occasion that REIDA was founded — and through the dedicated work of Andreas Loepfe, Daniel Sager and many more, produced within one year a pool of data including historical transaction value (the earliest around 1920) and valuations along with some other variables of interest.
And interestingly, the other data providers followed suit later on and produced themselves several indices as a strategic answer. Thanks to REIDA’s initiative, the public now has available indices covering different market segments estimated with different methodologies.
This preliminary work brought fruits already one year later, when I had used this data to estimate a long-run index of rental property based on the pool available at that time. You may see the evolution of the price index starting in 1937 (index at 1) on your left-hand axis while on the right-hand you may observe the number of transactions available for that year. The index nicely captures the late 1990 boom and ensuing bust along with the robust growth towards the soon to become 2008 peak (at that time, unavailable as the crisis was still unfolding).
An interesting observation is for example the year 2005, where we observe an unusually large number of transactions. What happened there? Well, I couldn’t learn this because the underlying data was and remains confidential. Why is the data confidential?
Well, because next to land, concrete and steel, private information is the magic ingredient real estate developers and investors rely heavily on in their decision-making. The trade-off between the loss of private information vs. the gain of a public good only recently captured the public eye through the Facebook debacle, but we can safely say this complicated trade-off is at the center of any data-driven industry. And which industry will save itself from the challenges data brings? The governance model comprised a fully centralized pooling agent that would gather the data from each individual provider, anonymize it and offer it back to the REIDA members.
And here comes along the blockchain technology! The most revolutionary innovation since sliced bread promises increased efficiency and speed by renouncing all type of centralization in favor of computer-driven decentralization.
Blockchain turns inside out the traditional model. A “constitution” is put in place which specifies each actor’s role — this constitution is written not by politicians but by users and is enforced by the computers on which it is programmed making it arguably less sensitive to arbitrary changes.
In a prototypical blockchain architecture, data is submitted for approval to all agents and for example, in our case, once the data is acknowledged as valid, the agent submitting it and conducting due diligence on the transaction might get rewarded with a token. But this is not the only configuration possible, only one of the more frequently encountered.
Blockchains empower new business and value creation models but do not ensure success by only uttering their name. A typical user might care very little about whether the blockchain is powered by a PoW or a PoS mechanism, but way more about the cost and convenience of the new product.
What made Bitcoin and its underlying blockchain architecture famous — decentralization, relative anonymity for private money creation — might be more about private money creation than anything else. I’m living proof of this as I’ve left recently central banking to join the industry of private money creators. It’s not immediate therefore that the same architecture will prove successful in solving all the inefficiencies plaguing real estate markets.
Does this mean blockchains are useless for the real estate industry? On the contrary. Suppose our REIDA blockchain rewards data providers with REIDA Tokens for each data packet submitted to the pool. The reward may be related to the amount of data provided (more tokens for more details related to a transaction), the volume of the transaction and market timing. At the end of day, a large transaction occurring during a relative tranquil market (say when CB promise to keep interest-rates at zero for ever) may not bring as many market insights as a medium size transaction happening 3 months after the key interest rate has been raised 100 bp.
Are data providers worried about providing too much data on large transactions and revealing sensitive info? Well, these data may be used in aggregate exercises as soon as they become available (such as benchmarking, index estimation and so on) but do not become available as individual transactions right away. Or maybe the price in REIDA tokens decreases as time goes by for certain transactions. All this managed by a smart contract.
Many setups are possible, the real estate professionals benefit from discovering the principles of blockchain-powered business models as compared to a fully-centralized model. Because at the end of the day, if mobile-inclined users prefer more control over how their digital footprints are used and avoid the data monopolies and scandals they bring, the real estate industry will need to adapt and provide such solutions.
The presentation is available by clicking the link https://prezi.com/view/M4PtuDEe7wkAWF4Rw70A/.
Originally published at blog.prepayway.com.