A well-known phenomenon in the real estate sector is information asymmetry related to real estate transactions. The past few years the real estate sector has become more transparent. Mainly due to the crisis, the demand for more information and alignment of ethical standards has been greater than before.
Stakeholders in the market discussed the need of a central transaction database and the StiVAD, the Foundation for Real Estate Data, was founded in 2011. Recently the next step in transparency in the real estate market was set when the Cadastre (the Dutch Land Registration Agency) and STivad (a Dutch foundation for real estate data, founded by property investors, pension funds etc.) signed an agreement to work together on a register for real estate transactions.1
Technical innovations and a growing availability of (open) geospatial data will enlarge transparency and reduce information asymmetry in real estate the upcoming years. Distinctiveness and added value is to be found in combining knowledge of different fields and interpreting large datasets. While ‘big data’ is finding its way in the real estate sector, the next potential disruptive innovation is knocking at the door in the real estate industry. It’s called the blockchain.
What is a blockchain?
Bitcoin, a cryptocurrency, is the first application of blockchain. Blockchain can hold, track, transfer and verify any information. Much like the Internet during the 1990s, blockchain is envisioned to enable a wide variety of applications and has the potential to transform a multitude of sectors. Although we expect that a mainstream adoption of this technology will take some time (some say years), as there are many hurdles to take, the potential is worthwhile exploring.
Blockchain is built on the principles drawn from cryptography and peer-to-peer networking. It allows unique monetary data to be exchanged via a distributed ledger (a record book of all transactions). Blockchain is a technology that allows people who don’t know each other to trust a shared record of events. This shared record, or ledger, is distributed to all participants in a network who use their computers to validate transactions and thus remove the need for a trusted third party to intermediate. A copy of the entire blockchain is available to all participants in the network and transactions on the blockchain are time stamped, making it useful for tracking and verifying information.
Nowadays most of the interest is in financial services and a variety of non-financial applications are also being explored. The technology is still evolving, many of the applications are very nascent, with predictions of timeline to significant adaptation, ranging from a couple of years to much longer.
Blockchain: a game changer
A blockchain represents a total shift away from the traditional ways of doing things. It places trust and authority in a distributed network rather than in a powerful central institution. In a blockchain based world of transactions, there is no need for the middlemen of finance - banks, governments, insurers, brokers, notaries and even paper currency. The blockchain takes this part of the transaction over from the professionals. It allows unique monetary data to be exchanged via a distributed ledger. The entire history of these transactions could be followed through the blockchain and is available for the public, so the blockchain provides full transparency.
Some bold predictions suggest that the institutions at the centre of current transaction system will cease to exist in just a few years. Others are more conservative, positing a relatively low impact on the short term for blockchain applications other than payments. The reality is likely to be somewhere between these two extremes.
Three advantages of blockchain for real estate
Real estate is one of the many industries that are expected to make great use of blockchain. Nowadays three advantages of blockchain for the real estate industry are spotted:
- Total transparency
Information asymmetry belongs to the past with blockchain and a level playing field is created. All data necessary for a transaction is stored in the database and is easily accessible for the buyer and seller of real estate. Relevant information about prices of comparable objects is available for everyone and not only for a few person or at a high price. The entire transaction history of the property could then be followed through the blockchain. Consequence is that the need of a middlemen or due diligence will disappear when this technology is adopted within the marketplace.
- Removing the risk of fraud
With a total transparent system of real estate ownership and the possibility to track down the transaction history of each property in the market the risk of fraud becomes less. Each year a lot of money is involved with the verification of ownerships, rights and titles transfers. Blockchain makes is possible to have accurate records which identify the current owner and provide a proof that he is indeed the owner. This makes it easier, safer and faster to buy and sell property.
- Speeding up the process associated with buying or selling a property
Blockchain makes is possible to program smart contracts. Using smart contracts based on blockchain, assets exchange could follow specific instructions encoded as part of transaction to be executed automatically once agreed criteria have been met. All the computers of the participants in the network validate every transaction.
Property transactions could be handled on a blockchain in a similar way to how payments between parties are handled using digital currencies like Bitcoin. Every ‘coin’ represents a unique house or piece of land and exchange is just like in any other transaction using digital currency.
It is expected that a blockchain based business in real estate will not happen overnight. While the technology offers some exciting prospects for the future, streamlining such an innovative protocol with a very administration-based industry will take several years. It will take the examples of a few innovative and forward-thinking real estate firms to lead the way and convince the masses that blockchain is the correct path to take. Although a mainstream adoption of this technology will take some time, as there are many hurdles to take, the potential is worthwhile exploring. We expect that within the next 2 years the first lease contracts will be based on blockchain technology. It’s better to be forward thinking, curious and open to these (possible) changes then to wait and see.
Even though it is too early to judge on the implications of the blockchain technology, it is clear it is too important to ignore.