Of the many species of professionals operating in the economy, the residential real estate agent stands out as least likely to receive the adulation of the masses.
Real estate agents are those warm and friendly six-per-centers whose warmth and friendliness usually disappear the moment the sales agreement has been signed and the 6% more or less secured.
In many ways, the most intriguing aspect of any residential house sale transaction is the 6% commission most Canadians automatically pay when they sell their homes. Whether the market is depressed or booming, whether it’s a $50,000 one-bedroom bungalow or an $800,000 executive residence, whether it’s downtown or in the suburbs, whether it’s in Toronto or Saskatoon, and whether the agent spent five hours or five months on the transaction, the commission is almost always 6%.
Until recently, the existence of the 6% rate looked like it would continue to be a permanent fixture of the Canadian real estate scene. One imagined there must be a clause in the charter of rights and freedoms that said ”all real estate agents are entitled as a constitutional right to commissions of 6%.”
Now, however, questions concerning the 6% fee are being raised by many, including consumer advocates and government officials. Tom Delaney, president of T. Delaney Inc. and a member of the Consumers Association of Canada, has recently called on governments to review the way real estate commissions are levied. The issue is expected to come up for review at the CAC’s Ontario regional board meeting later this week.
In Ottawa, meanwhile, the federal government’s bureau of competition policy has been investigating real estate commissions to determine whether real estate boards across the country have been conspiring to fix prices and lessen competition. There have apparently been allegations that some real estate boards have been refusing to co-operate with real estate agents who want to charge less than the standard 6%.
Exactly how far the competition bureau will take its investigation isn’t known, but the further it takes it the better. To quote Delaney, what the industry may need is a little deregulation to loosen some of the government-enforced structures that help keep the 6% fee in place.
The source of the price maintenance is the system of licences and registrations imposed on the industry by the provinces, a top-to-bottom system that makes price competition almost impossible.
The control begins at the bottom, with real estate salesmen. In Ontario, for example, a real estate salesman is defined as ”a person employed, appointed or authorized by a broker to trade in real estate.” It is illegal for a person to deal in real estate if not employed by a broker. Real estate brokers’ licenses are also controlled by the provinces. Without a license it is illegal to act as a broker. Once licensed, a broker is required to join a local real estate board, which is command central in the price-control system.
There are about 115 real estate boards across Canada, each of which operates a multiple listing service. The multiple listing service is crucial to the operation of most city real estate markets. Like stock exchanges, they are the information life-blood of the real estate brokers, agents, and salesmen. A broker who tries to sell a house outside the multiple listings service might as well be selling vacant land in a ghost town. The allegation is that local real estate boards have been refusing to grant access to the multiple listing service to brokers who are attempting to undercut the 6% commission.
The real estate establishment has a ready-made set of responses to complaints about the 6% commission, all of which should be dismissed as self-serving attempts to preserve an unjustifiably high price. For example, the industry usually points to the fact that average agent incomes are low, a fact that actually reflects the overload of people trying to get in on the 6% commissions. When the price is too high, supply naturally increases and creates surpluses, in this case a permanent surplus of agents.
UNFAIRNESS
Laughably, one real estate broker noted recently that the 6% fee was reasonable because it had not changed through decades of inflation, conveniently ignorning the faster-than-inflation rise in real estate values.
The greatest unfairness is the effect on home sellers, who are losing larger percentages of their investment than the 6% commission. Take, for example, a homeowner who three years ago paid $150,000 for a house, with $35,000 down as equity. If he sold the house today for $200,000, he makes a capital gain of $50,000. But his real estate commission of 6% on the resale value is $12,000.
But $12,000 is 25% of his capital gain. Some agents may deserve 6%. But who could possibly justify taking 25% of the homeowner’s gain on his house?