Two North American court cases are taking the real estate industry to task over commissions paid out to Realtors.
While the Canadian lawsuit has the potential shake B.C.’s housing market, experts don’t agree on what the fallout might mean just yet.
“The fundamental issue … is that there's a belief that a buyer's agent will steer their client to listings that have higher commissions offered by the listing agent,” said Tom Davidoff, an associate professor at the UBC Centre for Urban Economics and Real Estate.
“Somebody who buyers are trusting should be looking out for the buyer’s best interest, not shopping offered commissions. So anything that can be done to avoid that, I think is helpful.”
A proposed class-action lawsuit filed in January alleges that the Canadian Real Estate Association (CREA), alongside dozens of provincial and local real estate groups “conspired, agreed or arranged with each other to fix, maintain, increase or control the price for the supply of buyer brokerage services for residential real estate.”
South of the border, the National Association of Realtors (NAR) agreed two weeks ago to a $418-million settlement, as well as changes to the standard six per cent sales commission. This brings an end to a lawsuit that accused the industry association of artificially inflating real estate agent commissions.
“This is about fair play between participants in the real estate industry and in the public, and these rules are just not fair,” said lawyer Garth Myers, a partner at Toronto-based Kalloghlian Myers LLP, who filed the proposed class-action lawsuit in Canada.
There are 10 B.C. real estate boards named in the Canadian suit and eight brokerages.
Myers said that changes to the standard commission in the NAR case “eviscerates any defence that the Canadian defendants will have in relation to the necessity of these rules.”
“The fact that NAR walked away from these rules in the States, we think is very important,” he said.
“The main defence that we expect in Canada … is that these rules are so important to the proper functioning of the system, the whole system would break down in their absence. And the fact that the NAR was able to walk away from these rules in a system that is virtually identical, is proof positive that this system can function just fine without them.”
Trevor Koot, CEO of the British Columbia Real Estate Association, said that there is no question that the NAR case has captured the attention of the real estate industry and Canadian consumers.
"Canada however, is a different country with a differing legal and business framework than the US. As the CREA has indicated, they deem the case in Canada to be without merit," he said in an email to BIV.
In Canada, real estate commissions can vary from three per cent to seven per cent of the sale price, however, there is no set commission or standard. However, because this is a percentage of what a home sells for, as home prices rise so too is the price of commission, said Myers.
“People are queued up to be upset about anything to do with the real estate market, mostly because housing is a human need and there's a lot of people who see themselves at risk of not having the housing that's going to make them reasonably happy,” said Davidoff.
“I don't think this litigation is really fundamentally about housing affordability.”
If successful, Myers said that the case will put money into the pockets of sellers who have overpaid for commissions.
“I think it will make it less costly to buy and sell real estate generally. Will that have a downstream effect on the buyer? I don't know. But we're seeking to represent sellers and that’s who we’re acting on behalf [of],” he said.
When it comes to whether or not the CREA lawsuit will result in lower home prices, Davidoff said that it may not be the case.
“If there's more homes on the market, there's lower prices, but the people who are selling their homes are very likely moving to another owner-occupied unit. It's not common for people to transition from owning to renting. So the net increase in houses available isn't great and with more transactions, usually prices are actually higher,” he said.
“Buyers may have to start compensating Realtors out of their own pocket. I don't see this as a win for first-time buyers. … This is not a silver bullet or magic carpet ride to affordability.”
This is not the first time that the Canadian Real Estate Association or other real estate boards across the country have been challenged when it comes to commissions.
A 1988 order of prohibition from the federal government’s Competition Bureau states that the CREA and all real estate boards that are members of the association are prohibited “from fixing, establishing, maintaining, suggesting or controlling in any manner commission rates or fees for MLS.”
“The real estate industry at various times in various forms, both here and in the U.S., has faced various legal actions on that. And usually the end of these agreements [is] not to do that, but the world doesn't seem to change much. Every once in a while somebody comes along with a new law, a new lawsuit, a new government action,” said Ron Usher, general counsel for the Society of Notaries Public of B.C.
“It's a front-page story that's been going on for 30 years.”
The Competition Bureau said it is aware of the proposed class-action lawsuit.
“We remain focused on ensuring that consumers benefit from innovation and competition in the provision of real estate services and will take action whenever we find evidence of conduct that is prohibited by the Competition Act,” the agency said in an email to BIV.
Andrew Carros, managing broker of Engel and Völkers in Vancouver, said that he is not concerned about the case and that for him, nothing changes.
“It doesn't worry me one little bit, because I have always disclosed agency, my clients know exactly what I get paid, they understand my value. … In fact, it gives guys like me the ability to be able to explain this better and be able to get better documents out there,” he said.
Oakwyn Realty Ltd. broker Steve Saretsky said that while there is some uncertainty among real estate agents, it’s too soon to tell what the impacts will be.
“People are drawing massive conclusions, but I don't think we know enough yet,” he said.
“What's going to happen is you'll probably see a bunch of different business models coming out of it, lower fee structures, things of that nature.”
Editor's note: This story has been updated to include comments from Trevor Koot.
