Price fixing has sent Realtor commissions soaring in an already hot market, lawsuit alleges

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Much of the discussion about Canada’s real estate market has been dominated by the meteoric rise in the cost of housing.

But what’s often missing from that conversation is the parallel increase in what Canadians pay in real estate commissions nearly every time a home is bought or sold.

For example, a brokerage representing a buyer in 2005 in the Greater Toronto Area would have earned a commission of about $8,795 on the average single-family home — while in December 2021, the buyer’s brokerage would earn about $36,230, or four times more on that same home, according to Dr. Panle Jia Barwick, a leading economist on the real estate industries commission structure.

To put that jump in perspective, the median household income increased by just 14 per cent between 2005 and 2019, after adjusting for inflation.

That discrepancy is just one of the points laid out in a recent lawsuit, alleging price-fixing and anticompetitive behavior in Canada’s real estate market.

In the Greater Toronto Area, the average real estate commission exceeds $62,000 before tax. (Patrick Morrell/CBC)

The proposed class-action lawsuit launched on behalf of Toronto resident Mark Sunderland on April 9, 2021, claims that some of the country’s largest brokerages, including ReMax, Century 21, and IproRealty Ltd. among others, as well as the Canadian Real Estate Association and the Toronto Regional Real Estate Board, have “conspired, agreed or arranged with each other to fix, maintain, increase or control the price … for buyer brokerage services in the GTA. ”

Commission structures vary across the country, but typically real estate agents and their brokerage charge a percentage-based commission on the sale price of a home. In Alberta and BC, it’s seven per cent on the first $100,000 and three per cent on the balance. In other parts of the country, commissions range between four and five percent.

The allegations

While the seller pays the full commission, it’s split between the brokerage representing them and the one representing the buyer.

Sunderland’s lawsuit argues that the agreement known as the buyer brokerage commission rule, created by the Toronto Residential Real Estate Board and Canadian Real Estate Association, effectively forces sellers of residential real estate listed on the Multiple Listing Service (MLS) to pay the commission of the buyer’s real estate brokerage.

Similar practices exist within many other real estate boards across the country.

This arrangement has thwarted competition in the market by pushing sellers to pay for something they would not pay for in the absence of this agreement, the lawsuit argues — and it negates the ability to negotiate the price or quality of the service.

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Stephen Brobeck is a fellow with the Consumer Federation of America. He says with respect to commissions, the real estate industry functions as a cartel. (CBC)

“It’s not a typical smoky room conspiracy; it’s out in the open,” said Garth Myers, a partner in Kalloghlian Myers LLP, the law firm that filed the case on behalf of Sunderland and anyone who has sold a home in the GTA since 2010 .

The effect of this alleged price-fixing can be felt by those who don’t offer the standard commission rate, said Barwick, the economist focusing on the real estate industry’s commission structure.

The buyer brokerage commission rule “creates the incentive and ability for buyer brokerages to ‘steer’ buyers away from residential real estate properties where sellers offer lower than the norm buyer brokerage commissions,” she wrote as part of research commissioned by Kalloghlian Myers LLP for the case.

Merely the fear that this could happen is enough to pressure sellers into offering the standard commission, she writes.

The practice of steering is further enabled by Realtor.ca, which allows real estate agents and brokers to see the amount of commission on offer but hides the information from public view.

Similar lawsuit certified in the US

Sutherland’s lawsuit is similar to a class-action case in progress in the US against the National Association of Realtors and America’s largest real estate brokerages.

The US class action, which was certified last month, also alleges that anticompetitive conduct has taken place within the real estate industry, causing US home sellers to pay inflated commissions.

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Using hidden cameras, Marketplace producers found some real estate agents steering potential buyers away from low-commission homes, a practice that breaches the law. (CBC)

“Tens of billions of dollars are at stake,” said Stephen Brobeck, a senior fellow and former executive director of the Consumer Federation of America, a non-profit organization based in Washington, DC, whose research has helped inform the US case.

“In terms of commissions, the industry is striving to maintain a pricing cartel,” said Brobeck, noting it’s something that’s happening in the US and in Canada.

On the sale of the average Canadian home, which is now $746,000, the full commission — what’s split between the buyer and seller’s brokerages — amounts to between $26,330 and $37,300 before tax. In a market such as Toronto, the average commission exceeds $62,000 before tax.

When Sunderland sold his home, he paid “the standard 2.5 per cent” commission to the buyer’s agent and their brokerage, his lawyer said.

“His view, and the view advanced in the case is, the reason he had to pay [the 2.5 per cent] was because of this price-fixing conspiracy among the various brokerages in the GTA,” Myers said.

It’s the market that sets the rate, not MLS rules or collusion between brokerages.​​– Rui Alves, CEO of iPro Realty Ltd.

In March 2022, the Canadian Real Estate Association and the Toronto Regional Real Estate Board brought a motion to dismiss the entire action as having “no reasonable cause of action.” That motion will be heard in the fall.

Another defendant in the lawsuit said he feels the case is without merit.

“Our business is very competitive,” said Rui Alves, chairman and CEO of iPro Realty in a statement to CBC News. “It’s the market that sets the rate, not MLS rules or collusion between brokerages.”

iPro Realty does encourage sellers to offer the prevailing rate for the area — or may suggest offering a higher commission rate to the buyer’s brokerage in a slower market, he said.

“This proves that in no way are our fees fixed but simply reactive to competitor fees in the area, just like any other competitive business would do.”

CBC News contacted ReMax and Century 21; while Century 21 Canada said it doesn’t believe there is merit to the claim, it would not comment further.

ReMax said it wouldn’t comment, given the ongoing litigation.

Steering and real estate commissions

A 2021 Marketplace investigation into the issue of steering by real estate agents found that consumers’ fears around the issue are not unfounded.

To test if real estate agents would indeed steer buyers away from a low-commission home, Marketplace producers went undercover, posing as homebuyers looking for a home in Vaughan, Ont. As would-be buyers, the team asked three local real estate agents to book viewings at three properties on the market, including one offering only one per cent commission to buying agents instead of the 2.5 per cent considered standard for the area.

While one agent was upfront about the low commission and offered to negotiate the purchase anyway, the other two agents did not tell the buyers about the commission — and discouraged or warned them from seeing the home.

WATCH | Marketplace investigation into real estate ‘steering’:

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Investigation catches real estate agents breaking the law to keep commissions high, almost competition and block private sellers.

One of the agents steered the buyers by telling them the house was overpriced by $200,000 and said the owners would not budge on the price, which was not the case. The other agent told the buyers she was unable to book a showing and suggested the property might have tenants, a turnoff for many people wanting to move in themselves. The owners of the property told Marketplace they did not receive a showing request from this agent.

Further to that test, producers called 25 real estate agents across the country while posing as sellers interested in listing a home. When the agents were asked about lowering the commission rate for the buyer’s brokerage, 88 per cent of the agents warned against doing so.

“Although they’re not supposed to do it, some agents may be very cognizant of what they’re getting paid and push their buyer to another home,” said an agent in Halifax.

“I have had agents say to me, ‘You know we’re looking at two houses and they’re both a good fit, but I’m definitely sort of massaging them towards yours because there’s more in it for the Realtor,’ ” said another agent in Winnipeg.

The Canadian Real Estate Association (CREA) and Ontario’s regulator, the Real Estate Council of Ontario (RECO) would not talk to Marketplace about the investigation. However, shortly after learning about the findings, RECO issued a notice about steering to the more than 93,000 real estate agents, brokers and brokerages then under its purview, noting that such behavior breaches its code of ethics.

“In addition to being illegal, the conduct undermines consumer protection, consumer confidence and the reputation of the real estate profession as a whole,” the notice said.

Still, it’s rare to see sellers offering rates lower than the standard buyer’s commission. According to Toronto real estate agent Alan Spivak, sellers offering commissions of less than 2.5 per cent to buyer brokerages in the Toronto area represented less than one per cent of total listings at the time of his review.

“This is consistent with my experience for all residential real estate in the GTA since at least 2010,” he wrote in an affidavit included in Sunderland’s statement of claim.

How to increase competition

If there were no buyer broker commission rules in place, Barwick writes, services would become more competitively priced — buyers would pay for their own representation and could negotiate pricing or forgo the service altogether.

This is already the case in the UK and Australia. There, buyers and sellers pay for their own representation and commission rates are lower.

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In Australia and the United Kingdom, buyers and sellers pay for their own representation in real estate transaction and there’s more competition as a result. (Norm Arnold/CBC)

“That would also encourage sellers to negotiate more vigorously with their listing agents and those commission rates would most likely come down too,” Brobeck said.

Brobeck’s own research has determined that “decoupling” real estate commissions in this way could drop standard rates by one to two per cent over a couple of years.

The Canadian Real Estate Association told CBC News it would not comment on the Sunderland case because it’s before the courts.

The Toronto Regional Real Estate Board, another defendant in the case, said it “has no involvement with and does not consider or discuss REALTOR® commissions.”