At the heart of the case and the settlement revolves around the elimination of traditional commission structures and rules that have long governed real estate transactions. Photo Credit: Pexels.
In a ground breaking decision last week, the National Association of Realtors (NAR) in the United States settled a class-action lawsuit and agreed to changes that will redefine the America real estate industry. The settlement, valued at $418 million, aims to reform commission practices, potentially reshaping how homes are bought and sold. While this settlement is specific to the United States, it is forcing a conversation in Canada about the way that release agents earn a living.
At the heart of the case and the settlement revolves around the elimination of traditional commission structures and rules that have long governed real estate transactions. Previously, listing agents were mandated to determine compensation for buyer brokers on Multiple Listing Services, a service that is also used in Canada. However, under the terms of the settlement, this practice will cease, enhancing transparency and altering the dynamics between agents and clients. Meaning that buyers and sellers are able to negotiation the percentage an agent receives for the sale of a home.
The settlement in the U.S. underscores the growing scrutiny of commission structures and the need for greater transparency and fairness in real estate transactions. The current commission model in Canada typically involves real estate agents and brokerages charging a percentage-based commission on the sale price of a home, typically split between the seller’s and buyer’s agents. Meaning that higher the house is priced, the better the commission will be. Since housing prices have exploded, agents have been pulling in good sized pay days with each sale.
The high cost of housing has long been a concern for the federal government, particularly amid a housing shortage that disproportionately impacts renters and first-time homebuyers. While efforts such as the Housing Accelerator Fund aim to address housing supply issues, tackling commission structures presents another avenue increase affordability. However, a cap on commission falls under provincial jurisdiction, posing a challenge for federal policymakers.
Despite jurisdictional barriers, the federal government can impose legislative measures to cap commissions as a policy instrument to lower housing costs without taxpayer expenditure. Yet, such interventions often face resistance from provincial governments, as seen in previous disputes over the Environmental Assessment Act. Provincial governments tend to unite against perceived federal overreach, posing a significant obstacle to legislative changes.
Nonetheless, the potential benefits of commission caps cannot be overlooked. In Ontario, where the average house sold for over $873,000 last month, a standard commission of five percent translates to substantial earnings for agents. Yet, technological advancements have transformed the real estate sector, diminishing the role of agents in certain aspects of the transaction process. While agents offer valuable expertise beyond administrative tasks, questions arise regarding the proportionality of their compensation.
The prospect of a commission cap garners support from many Canadians, as lower rates could mean increased savings for buyers and sellers alike, potentially facilitating greater market participation. However, a cap alone cannot address all housing market challenges but represents a valuable tool in the pursuit of affordability and accessibility.
While legislative interventions face jurisdictional hurdles, exploring options to regulate commissions could contribute to a more equitable and accessible housing market for Canadians. Without some concert steps, Canadians will remain locked out of the market for years to come.
Daniel Perry is a consultant with Summa Strategies Canada, one of the country’s leading public affairs firms. During the most recent federal election, he was a regular panelist on CBC’s Power and Politics and CTV Morning Ottawa.
