The typical commission for real estate transactions in the GTA is 5 per cent, split between buyer and seller reps, though some in the industry claim the true rate is now closer to 4 per cent.Graeme Roy/The Canadian Press
As house prices rose to never-before-seen levels in Ontario in recent years, a class-action lawsuit that alleges price fixing in real estate commissions has steadily been churning away in the background.
“This isn’t your typical price-fixing conspiracy,” said lawyer Garth Myers, a partner in Kalloghlian Myers LLP. “This is an agreement that is well documented: the rules of TRREB [Toronto Regional Real Estate Board] and CREA [Canadian Real Estate Association] cause inflation in buyer brokerage commissions.”
On behalf of Toronto resident Mark Sunderland, Kalloghlian Myers has alleged practically every major brokerage brand in organized real estate – from Re/Max and Royal LePage to Sutton Group and IPro Realty – is part of the conspiracy. At issue is a common practice where an agent representing a home seller must list the commission they will offer to co-operating buyers’ agents. Mr. Myers and the experts his firm has hired allege this a form anti-competitive business practice called “steering.”
What they claim is that from the moment you list a property for sale in Ontario, there are anti-competitive rules of the key real estate bodies that keep commission rates artificially high, and there are also more subtle but measurable pressures on sellers to accept these high commissions or face lower buyer interest and potentially longer timelines to sell.
TRREB released a statement on behalf of chief executive officer John DiMichele: “TRREB has no involvement with and does not consider or discuss realtor commissions. Service levels and fees are for discussion between the consumer and their realtor/brokerage.”
However, according to Kalloghlian Myers’ key expert, TRREB’s rules do play a role in restraining competition over commission rates. Dr. Panle Jia Barwick is an economics professor at Cornell University with a PhD in economics from Yale who has published extensively on real estate brokerage commission structures. She studied the market in the Toronto area and noted that in order to list a property for sale on the digital Multiple Listing Service operated by TRREB – the dominant platform for real estate data in the region – sellers had to post a co-operating commission rate that would be visible to brokerages, but not visible to the public (zero was not an acceptable rate).
The typical commission for real estate transactions in the GTA is 5 per cent, split between buyer and seller reps, though some in the industry claim the true rate is now closer to 4 per cent. Because the seller is the party that ends up paying both agents, there’s more negotiation over the listing agent’s share of the commission, but buyer’s agents tend to get a standard 2½ per cent offer. In April, less than 1 per cent of all listings posted for sale on TRREB had a buyer commission that was less than 2½ per cent.
“Why hasn’t that rate come down? That’s just indicative there’s a restraint,” Mr. Myers said. “In a competitive marketplace, you’d expect that to come down.”
Dr. Barwick cites her own Boston-area research from 2010 that found “sellers who offer higher commissions to buyer brokerages experience better sales outcomes and are more likely to sell their properties.” She has since published research that shows buying agents tend to steer their clients away from discount brokerages that offer lower posted commission rates: “It is in their interest to persuade their clients to favour properties with higher commissions.
“The presence of steering, as well as sellers’ perception that such steering could occur, exerts pressure on sellers not to deviate from the ‘norm’ where commissions to the buyer brokerage are 2½ per cent of the transaction price.”
In addition, once a commission has been added to a listing, TRREB’s bylaws state it cannot be negotiated over in a subsequent transaction. “Rule 740 forbids any alteration of the original commission offer posted to the Toronto MLS between the time of registration of a purchase offer and acceptance of that offer. These rules impede active negotiation,” Dr. Barwick writes.
“Similar lawsuits have bounced around the United States,” said Phil Soper, President and CEO of Royal LePage Real Estate Services Ltd. “There isn’t any price fixing; there’s generally accepted standards.” While the lawsuit is before the courts, Mr. Soper declined to argue over specific claims, but said more broadly: “I don’t think it’s going to fly … No brokerage, by the way, gets involved in setting the price; we don’t even talk about commission.”
The case had hearings in April and the parties are awaiting rulings on whether the complicated class-action process will move ahead. But the amended plaintiff complaint has now passed 3,000 pages of statements, documents and reports to bolster the case.
But it would appear at least one political party contesting the current Ontario election has made note of the commission issue: The Liberal Party platform, released Monday, has a section that calls for all commissions to be publicly advertised in residential real estate sales – both the listing and buying agent rates. Liberal Leader Steven Del Duca said the move springs from feedback from many first-time buyers who say they are concerned about a “lack of fairness and transparency” in the market.
The biggest irony in Dr. Barwick’s report is that she claims the same forces that keep commissions high are bringing thousands of new agents into the profession and dilute the average number of transactions an agent completes, which reduces the available income for existing agents. She notes that high fees for two agents in a home sale is just not the norm everywhere in the world. “In the UK, where commission rates are a fraction of those in the GTA, there are more than one million housing transactions each year with about 50,000 agents,” she writes. “In contrast, in the GTA, there are currently more than 64,000 real estate broker and salesperson members registered with TRREB for a market with around 100,000 properties. In other words, the GTA has a tenth of the housing transactions as the UK, but more real estate agents. There is no evidence that the quality of service is lower in the UK.”
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