The rapid rise in housing costs has dominated much of the discussion about the real estate market in Canada.

But what is often missing from this conversation is talk about the parallel increase in what Canadians pay brokers every time a home is bought or sold.

For example, a real estate company representing a buyer in 2005 in the Greater Toronto Area could have earned a commission of about $8,795 on an average single-family home – while in December 2021, the company would have earned about $36,230, or four times as much for the same home, according to Dr. Banley Jia Parwek, a prominent economist in the Real Estate Industry Structure Committee.

To put this jump in perspective, the average household income increased by only 14 percent between 2005 and 2019, after adjusting for inflation.

This discrepancy is just one of the points outlined in a recent lawsuit, alleging that major players are fixing prices and engaging in anti-competitive behavior in the Canadian real estate market.

The class action lawsuit was launched on behalf of Toronto resident Mark Sunderland on April 9, 2021, claiming that some of the largest real estate companies in the country, including ReMax, Century 21, and IproRealty Ltd. among others, as well as the Canadian Real Estate Association, "conspired or agreed or arranged with each other to fix, maintain, increase, or control the price..."

Commission structures vary across the country, but real estate agents and their brokerages typically charge a commission based on a percentage of the home's sale price. In Alberta and British Columbia, the rate is seven percent on the first $100,000 and three percent on the balance. In other parts of the country, commissions range between four and five percent.

Allegations

While the seller pays the full commission, it is split between the real estate agent who represents them and the agent who represents the buyer.

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

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

The lawsuit says this arrangement stifles market competition by making sellers pay for something they would not pay for in the absence of this agreement – and it denies the ability to negotiate price or service quality.

Parwek, the economist focusing on the real estate industry commission structure, said the impact of this alleged price fixing can be felt by those who do not pay the standard commission rate.

She wrote that the mere fear of this happening is enough to pressure sellers into offering the standard commission.

This practice is enabled by Realtor.ca, allowing real estate agents and brokers to see the commission amount offered but keeping the information hidden from the general public.

Sunderland’s lawsuit resembles the ongoing class action lawsuit in the U.S. against the National Association of Realtors and the largest real estate brokerage firms in America.

The class action lawsuit in the U.S., which was certified last month, alleges that anti-competitive behavior occurred within the real estate industry, forcing home sellers in the United States to pay inflated commissions.

Brobeck said, "When it comes to commissions, the industry strives to maintain price unity," noting that this is something happening in both the U.S. and Canada.

When selling the average Canadian home, which is now $746,000, the full commission – divided between the buyer's and seller's brokerages – ranges between $26,330 and $37,300 before taxes. In a market like Toronto, the average commission exceeds $62,000 before taxes.

His lawyer said that when Sunderland sold his home, he paid a "standard 2.5 percent" commission to the buyer’s agent.

Another defendant in the lawsuit said he feels the case is baseless.

Roy Alves, Chair and CEO of iPro Realty, said, "Our business is very competitive." "It is the market that determines the price, not MLS rules or collusion between brokerages."

He said iPro Realty encourages sellers to offer the prevailing rate for the area – or they might suggest offering a higher commission rate to buyer brokers in a slower market.

Guidelines and Real Estate

A 2021 Marketplace investigation into the issue of real estate agent steering found that consumer concerns about this issue are unfounded.

To test whether real estate agents would actually steer buyers away from a low-commission home, Marketplace producers went undercover, pretending to be homebuyers looking for a home in Van, Ontario. As a potential buyer, the team asked three local real estate agents to book showings at three properties on the market, including one offering a commission of only 1 percent to buyer agents instead of 2.5 percent.

While one agent was upfront about the low commission and offered to negotiate the purchase anyway, the other two agents did not inform the buyers about the commission – and either refused to show the home or discouraged them.

One agent steered buyers by telling them the home was overpriced by $200,000, and said the owners would not budge on price, which was not true. The other agent told the buyers she was unable to book a showing and suggested the property might have tenants, which is a deal-breaker for many people wanting to move in themselves. The property owners told Marketplace they had not received an offer request from that agent.

In addition to this test, producers called 25 real estate agents across the country while pretending to be interested sellers listing a home. When agents were asked about reducing the commission rate for the buyer's brokerage, 88 percent of the agents warned against doing so.

An agent in Halifax said, "Even though they’re not supposed to do that, some agents might be very aware of what they’re getting and steer their buyers to another home."

The Canadian Real Estate Association (CREA) and the regulator in Ontario, the Real Estate Council of Ontario (RECO), did not speak to Marketplace about the investigation. However, shortly after learning about the findings, RECO issued a notice about steering to more than 93,000 real estate agents, brokers, and brokerages under its responsibility, pointing out that such behavior violates its ethical code.

However, it is rare to see sellers offering less than the standard buyer commission. According to Toronto real estate agent Alan Spevak, sellers offering less than 2.5 percent commissions to brokerages in the Toronto area represent less than one percent of total listings.

How to increase competition

Parwek writes that if buyer brokerage commission rules were not in effect, services would become more competitive – buyers would pay for their own representation and could negotiate prices or forego the service entirely.

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

Parwek said this would encourage sellers to negotiate more aggressively with listing agents, and these commission rates are also likely to fall.

Brobeck’s own research found that this "unbundling" of real estate commissions could reduce standard rates by between one and two percent over two years.

Edited by: Dima Abu Khair