The United States is leading a roiling new era of competition law, where governments have pivoted from years of inaction to litigate the questionable methods by which some big businesses operate.
A landmark decision came in early August, when the federal government won a case against Google. A U.S. District Court ruled Google is a monopolist and wielded its dominance of internet search to maintain that monopoly.
Economic power exerted by large tech firms may be the most obvious target of reform, but such issues exist across the American (and Canadian) economy, after decades of unfettered corporate consolidation greenlighted by previous governments.
The buying and selling of real estate in the U.S. is undergoing a similar reckoning. People in the U.S. (as in Canada) pay some of the highest real estate transaction fees in the world. Last October, a U.S. jury ruled against the National Association of Realtors in a class-action lawsuit case over high fees paid on housing deals, often around 6 per cent. The decision found the industry conspired to inflate fees. Instead of appealing, the real estate agents this March settled for a lower penalty and agreed to change industry rules around how fees are decided.
The deal went into effect in mid-August but industry continues to fight against change. Academic research published last year shows agents – who are supposed to be working on behalf of their clients – routinely steer people away from deals with lower fees. Such homes take longer to sell, the research found, as agents for buyers tended to avoid them.
Real estate in the U.S. and Canada operates along similar lines. The person selling a home pays their agent, who divides the money with the buyer’s agent. Outsized fees have drawn an eager work force of real estate agents. In the U.S., they number 1.6-million. In Canada, it’s more than 160,000. In the United Kingdom, where fees are below 2 per cent, there are fewer than 50,000 agents.
What irks many buyers and sellers is that fees have not changed much as prices to buy a home have soared. Statistics Canada data shows that agents and brokers (residential and commercial) were paid $2.43-billion in 2022, as the industry enjoyed a hefty operating profit margin of 31.3 per cent. In 2012, agents and brokers were paid $1.18-billion, when the industry’s operating margin was 25.3 per cent.
Such fees inflate the price of homes. There are many other inflated costs in the housing market – starting with rapidly increasing taxes on new homes that masquerade under the label development charges – and agents do provide a service to clients. Yet it is unusual that agents’ compensation doubled over a decade as they sold roughly the same number of homes then and now. There are low-fee agents but take a look at MLS, the central online hub for listings: a typical listing does not include the selling agent’s fee. It should be mandatory to disclose it to all viewers.
Agents’ fees aren’t fixed but there are standard rates across Canada. Agents will say people can negotiate but there is a major power imbalance between the agent, who handles deals all the time, and a buyer or seller for whom such an event is rare, never mind the emotional or financial stress involved. There’s a disincentive to bargain over the fee when clinching a deal is at stake. “Agents have such great advantages over consumers in any negotiation,” the Consumer Federation of America has said.
In Canada, a potential class-action lawsuit over real estate commissions is in Federal Court. Last September, a judge allowed the case to move ahead to the certification phase. The next hearing is in October.
Meanwhile, the U.S. Department of Justice this spring revived an antitrust investigation of the National Association of Realtors, the group that settled the consumer lawsuits in March. And just last week, the Justice Department sued RealPage, a software company that works with landlords. It’s a controversial product used in Canada as well. The U.S. government alleges RealPage operates an “unlawful scheme to decrease competition among landlords in apartment pricing” – one that “harms millions of American renters.”
This space has celebrated the new era in competition law. Across the economy, businesses and their sometimes overly aggressive actions merit much more scrutiny than they received during the laissez-faire years of decades past, and that includes Canada’s real estate industry.