Canadian real estate agents may be in for a significant change to their paycheque. Two years ago, a class action was launched alleging real estate sale commissions are price-fixed in Greater Toronto. This week, industry defendants had their attempts to dismiss the case come to an end. A federal judge just determined the class action is valid, giving the case a green light to proceed.
Here’s why it’s happening and how it can lead to shrinking commissions.
Ontario Real Estate Commissions
Ontario Realtors are almost always paid on a commission basis. The province allows three commission models—a fixed amount, a percent of the sale, or a combo of the two. The type of compensation is negotiated between the seller and their agent, with the buyer’s agent collecting half the haul.
Officially, brokerages are free to set their compensation. Real estate boards don’t mention an acceptable rate, though some systems won’t allow a zero rate. However, in the Greater Toronto Area (GTA), it’s hard to find a property without a 5% commission rate, a generally accepted standard in the industry.
Since the sale price reflects the commission and it scales as a rate, GTA buyers pay through the nose. The commission on the average home has gone from $21.5k in 2010 to $57k in 2023, a 164% increase. That’s over triple the target rate of inflation, which probably sounds a bit cushy to many.
The commission boom has resulted in over 40k agents at TRREB for roughly 5k monthly sales. Considering the real estate industry lives by the supply and demand mantra, it’s odd that the oversupply of agents hasn’t pushed commissions lower, right? That’s a key issue this class action lawsuit hopes to resolve.
A Class Action Alleges Greater Toronto’s Real Estate Industry Price-Fixes Commissions
In 2021, Kalloghlian Myers LLP filed a class action claiming “a conspiracy, agreement or arrangement to fix, maintain, increase, or control” commissions for homes on Greater Toronto’s MLS. A tight group of brokerages and real estate trade groups have supposedly worked together to help fix commissions.
Amongst the named defendants are the Toronto Regional Real Estate Board, The Canadian Real Estate Association, Re/max Ontario-Atlantic Canada, Inc. O/a Re/max Integra, Century 21 Canada Limited Partnership, Residential Income Fund L.P., Royal Lepage Real Estate Services Ltd., Homelife Realty Services Inc., Right At Home Realty Inc., Forest Hill Real Estate Inc., Harvey Kalles Real Estate Ltd., Max Wright Real Estate Corporation, Chestnut Park Real Estate Limited, Sutton Group Realty Services Ltd. And iPro Realty Ltd.
In particular, they see the buyer’s agent compensation as the issue. The listing agent determines the commission, and a buyer’s agent typically collects half the haul. They argue that an unrestricted market would allow the buying agent to negotiate the commission paid. In a market oversupplied with agents, this could enable a push for lower fees.
Since the sale price reflects the commission, overpaying on the rate of commission leads to a larger shared loss. The seller nets a smaller cut of the final price, and the buyer pays out more than if they shopped around.
The Real Estate Industry’s Attempt To Dismiss The Suit Just Failed
Over the past two years, the real estate industry’s defendants have been trying to have the case dismissed. The industry hit a roadblock this week after a federal court shut down its attempt to have the case dismissed and delivered a green light to the class action.
The recent move doesn’t mean price fixing is proven, but it means the class action isn’t frivolous. There hasn’t been much discussion about the suit over the past two years since the real estate industry, and surely its army of lawyers, tried to have it thrown out. The federal court’s dismissal of this attempt makes it very real, though.
Whether price fixing occurred or not will ultimately be up to the court. However, it’s hard not to see the case driving a more flexible commission environment in the future.