As the price of homes skyrocketed across Canada, it wasn't just sellers who reaped the financial rewards -- real estate agents and brokerages saw commission payouts increase, too. But according to a lawsuit filed on behalf of a Toronto resident, brokerages and agents across the GTA have been flagrantly earning more than their fair share for quite some time.
The suit alleges that several of the largest brokerages in Canada, as well as the Canadian Real Estate Association (CREA) and the Toronto Regional Real Estate Board (TRREB), are engaging in price fixing when it comes to buyer brokerage services in the GTA. RE/MAX, Century 21, Royal LePage, and IproRealty Ltd. are just some of the brokerages named in the filing.
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Although commission structures can vary from province to province, typically the seller is responsible for paying the entirety of the commission. It's then split between the selling and buying agents with a pre-agreed upon percentage going to each. This agreement, known as the buyer brokerage commission rule, was created by the TRREB and CREA and requires listing brokerages to advertise on the MLS the commission percentage that the buying agent will be given if their client purchases the home.
What the lawsuit alleges is that not only does this practice lead to price steering -- where agents intentionally steer buyers away from any properties that would earn them lower than the typical 2.5% commission -- but that it has thwarted any semblance of competition.
"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 2.5% of the transaction price," economist Dr. Panle Barwick wrote in an expert report included as part of the proposed class action lawsuit.
The suit, brought on behalf of anyone who sold residential real estate listed on the MLS after March 11, 2010, references a 2021 undercover investigation carried out by CBC that exposed agents advising their clients against viewing a home that was offering a lower commission of 1%. One of the agents falsely told the undercover clients that the home was overpriced by $200,000 and that the owners refused to come down on the price. Another told the clients that she was unable to book a showing despite never sending in a showing request. This all happened despite the fact that price steering breaches the Real Estate Council of Ontario's (RECO) code of ethics.
Attorney Garth Myers, a lawyer at Kalloghlian Myers LLP, the firm that filed the case on behalf of Toronto resident Mark Sunderland, says that this reality has effectively forced sellers to pay high commission rates.
"When you're selling, for most people, the biggest asset that they own, do you want to take the risk that by putting a lower commission than, say, 2.5%, that you'll get fewer potential bidders or no bidders on your house because buyer brokerages won't show the house to their clients?" Myers said. "No, of course not. And so you put in a high number for the offer to the buyer brokerages, and they know this."
Indeed, fewer and fewer listings are offering commissions below the expected rate. Barwick references a study that found buyer commissions below 2.5% were seen in just 7% of GTA transactions between 2001 and 2009. Although already a small number, the same study also found that by 2016, it had plummeted to less than 1%.
Why Are Sellers Paying For The Buyer's Services?
At the heart of the issue brought forward in the lawsuit is the fact that the TRREB and CREA buyer brokerage commission rule exists at all. Were sellers not forced to advertise the buyer brokerage commission percentage in a listing, price steering, theoretically, would not be an issue. Agents, unaware of how high of a payout they would be getting, would have no commission-related incentives to steer clients one way or another.
Better yet, were buyers, rather than seller, responsible for paying buyer brokerage commissions, it would increase competition among buyer brokerages and put downward pressure on the commission percentage.
"There's no reason that these rules have to be in place. Absolutely no reason," Myers said. "There are other jurisdictions all over the world in which rules like this don't exist."
Michael Walsh, President of Exclusively Buyers Inc., a real estate brokerage dedicated exclusively to buyers, agreed that the requirement to list the buyer brokerage's commission needs to change to dispel steering and allow for more competition.
"It is patently ridiculous what's going on, but the the MLS itself demands steering," Walsh said. "If you're a listing agent, you can't list a property on the MLS without offering to compensate the buyer's agent."
Walsh concurred that the listing broker should be prohibited from offering anything to the buyer's broker. If buyers are forced to pay that commission, it could encourage brokerages to make themselves more attractively priced -- something he's seen happen on the sellers' side already.
"There are lots of examples in Oakville where -- I think as a function of consumers just becoming better educated -- they shop around and they'll always find a listing agent who will do it for less," Walsh said, but noted that currently, "the listing agent very well may negotiate at a lower listing commission, but the part that's paid to the buying agent will remain the same."
Walsh points out, however, that it is brokerages who have the final say over what the listing commission will be, not individual agents.
Commissions Are Up But Sales Per Realtor Are Down
The rise in home prices coupled with the fixation of commission rates means that buying and selling real estate has become increasingly lucrative over time, Barwick states. But at the same time, the number of people trying to get a piece of the pie has skyrocketed.
RECO registrants, which includes brokers, agents, and brokerages, have more than doubled from 2003 to 2020, going from 43,408 to 93,948. At the time of the lawsuit's filing, TRREB's website said it "serves more than 64,000 licensed real estate Brokers and Salespersons in and about the Greater Toronto Area." That number is now 66,000. What Barwick has found is that brokers and agents in the GTA aren't selling more properties -- they're selling less.
Using data from Statistics Canada, she found that the annual aggregate number of sold properties over the number of brokers and salespersons has dropped from 3.15 in 2000 to just 1.49 in 2020.
"The GTA’s broker and salesperson productivity is very low compared to that of brokers and salespersons in other countries," Barwick wrote. "In the US, for example, that same ratio is 4.5. In the UK, a country with a more competitive brokerage industry... the ratio is 20.2, about eight times as high. In London, England, a city that is comparable to the GTA in market size, the ratio was seven in 2020."
Barwick goes on to state that various studies and economic literature have that found firms in competitive markets are more productive. The unfortunate reality for GTA agents Myers says, is that they are left trying to land deals in a market where they don't have the ability to make themselves more attractive to buyers from a financial perspective.
"That's the sad thing, right? Your initial thought is 'oh god, there's a price fixing conspiracy, the agents must be making off like like bandits,' and some of them are, but the reality is because this is common, where you have price fixing in markets where there's low barriers to entry -- and that's exactly what the real estate agent market is, it's very, very easy for people to become real estate agents -- what happens is you have a flood of people driven into that industry because they see these elevated commissions," Myers said. "So who's benefiting? It's not the agents on the ground. I think they're getting killed by these rules. It's the brokerages and the franchisors who reap all the benefits of it."
A Long Battle
With the named defendants armed with some of the biggest law firms in Toronto, Myers says they're preparing for a long-winded battle. In March of this year, the CREA and TRREB brought forward a motion to dismiss the entire case, stating it has "no reasonable cause of action."
"This case is attacking, fundamentally, their business model and their bottom line and and because of that, I expect them to do everything in their power to try to stop it," Myers said.
The motion will be heard in the fall.
