A Federal Court judge on Sept. 25 allowed a class-action lawsuit alleging home sellers in the Toronto area have been forced to pay artificially inflated commissions for years. The lawsuit alleges major brokers and real estate organizations in Toronto implemented rules that essentially stifled competition for buyer brokerage services, leading to higher prices. But what exactly is buyer brokerage and what is its role in the potentially landmark lawsuit? The Financial Post’s Shantaé Campbell explains.
Following a move by the Bank of Canada to increase its policy rate this week, one real estate developer said the latest rate hike provides a sense of certainty to the market, which he thinks will heat up once interest rates stop moving higher.
Barry Fenton, president and chief executive officer of Lanterra Developments, said in a panel discussion with BNN Bloomberg Wednesday that interest rates are not the “full driver” of the real estate market. He said that he was “actually pretty happy” that the recent rate hike brought certainty.
On Wednesday, the Bank of Canada delivered a 25 basis point increase to its policy rate, bringing it to five per cent. The move marked the highest point for the Bank of Canada’s interest rate in 22 years.
Fenton said even if rates were increased by one per cent this week that “as long as we knew that there was certainty in the market and we were done, I think the market will continue to do very well.”
“I think that once we stop the interest rate increases, or at least people think that there’s certainty, we’re going to be way on fire,” he said.
Part of Fenton’s optimism in the real estate sector has to do with historically large population increases.
According to Statistics Canada, the nation’s population increased by an estimated 292,232 people between Jan. 1, 2023 and April 1, 2023.
Robert Kavcic, a senior economist at BMO Capital Markets, said in the panel Wednesday that Canada has a strong supply and demand relationship that supports Canada’s housing market.
“I would completely agree that fundamentally we have an extremely strong supply and demand situation in Canada and specifically Ontario, underpinning the housing market,” he said.
“And that’s why it’s really hard to drive a material long-term correction because there is that fundamental demand there.”
Kavcic said that the country “just cannot build enough, especially single detached,” but there was a problem in leaving interest rates at levels which were “far too accommodative” during 2021. He said this caused “a lot of froth to build up on top of that fundamental base,” but higher interest rates over that last year and a half have “taken that froth out of the market.”
“So we’re at a level where rates are closer to where they should be, maybe a little bit on the restrictive side, that froth has gone and the market has rebalanced itself based on those underlying fundamentals,” he said.
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Hong Kong shares drop 3%, dragged down by real estate and energy
Hong Kong’s Hang Seng Index dropped more than 3% Tuesday, dragged by its real estate and energy sectors.
The benchmark index’s loss of over 500 points is a significant decline, Everbright Securities’ Kenny Ng told CNBC via e-mail.
“On one hand, this was driven by profit-taking following a 400-point rise last Friday,” the securities strategist explained. “Additionally, the US dollar index has remained relatively strong, exerting downward pressure on the Hong Kong stock market.”
The index was last trading down 3.16% after coming back from a holiday on Monday.
Ng highlighted how property stocks were among the largest decliners Tuesday, given the high-interest environment.
Hong Kong listed property stocks were firmly in the red. Country Garden Holdings plunged 7.67%, leading losses in the sector, while Longfor Group Holdings lost 4.82%. New World Development shed 6.69%, and Henderson Land Development traded 6.15% lower.
“Coupled with the relatively sluggish mainland Chinese real estate market, it is expected that this sector will continue to face downward pressure in the short term,” Ng added.
China’s property market has struggled with faltering consumer confidence, as property giants Evergrande and Country Garden were mired in debt problems.
Separately, beleaguered Chinese property giant Evergrande resumed trading in Hong Kong. Shares have been volatile since resuming trade in late August following a 17-month suspension. The stock rose 22% in early trade. The firm’s EV unit also halted trading Tuesday.
Toronto real estate class-action could affect billions of dollars in commissions
What does ‘buyer brokerage’ mean?
This transformation prompted the creation of specific legislations and regulations by provincial governments and real estate regulatory bodies in Canada, such as the Real Estate Council of Ontario (RECO), the Canadian Real Estate Association (CREA) and the Toronto Regional Real Estate Board (TRREB).
These rules and protocols serve to formalize and oversee buyer brokerage relationships by instituting a framework governing duties, responsibilities, disclosure, consent and confidentiality.
Where do commissions come in?
Nationwide, commission structures for real estate agents and brokerages typically involve a percentage-based commission derived from a home’s sale price, but the rates vary.
For example, if a home sells for $1 million with a commission of five per cent, the total commission amounts to $50,000. This sum, paid by the seller, is generally shared equally between the seller’s and buyer’s agents, each receiving $25,000. However, the precise division can fluctuate, being contingent on the agreement established between the seller and their agent.
Why are commissions split this way?
According to CREA, the organization does not mandate a specific commission split or dictate how commission should be allocated between the listing and buyers’ realtors.
Rule 22.214.171.124 in CREA’s by-laws and rules states: “The listing realtor member agrees to pay to the co-operating (i.e. buyer’s) realtor member compensation for the cooperative selling of the property. An offer of compensation of zero is not acceptable.”
In an email, RECO said commission rates are not fixed. “Commission rates are not set or approved by the Real Estate Council of Ontario, government authorities, real estate associations or real estate boards,” it said.
The splitting of commission between the buyer’s and seller’s agents is nonetheless a well-established practice in real estate designed to promote cooperation, balance and fairness within the industry. The idea is that a shared commission incentivizes buyer agents to introduce more potential buyers to the home, leading to a faster and possibly more profitable sale.
Furthermore, the commission model serves to reduce potential conflicts of interest by eliminating the buyer’s direct financial obligation to their agent, preventing undue pressure on buyers and ensuring accessibility to agent services.
Why is this a problem?
The lawsuit lodged by plaintiff Mark Sunderland against defendants TRREB, CREA and various real estate brokerages contends that an arrangement known as the ‘buyer brokerage commission rule’ has been in effect since at least March 2010.
Sunderland’s lawsuit posits that this arrangement has impeded market competition, compelling sellers to incur costs they would not otherwise bear in the absence of such an agreement. Furthermore, it contends that this setup precludes the negotiation of price and quality of the service.
Barwick says that even without formal policies mandating uniform rates, brokers, reliant on peer co-operation to draw buyers to properties, can help uphold a standard commission rate locally, especially for buyers’ brokers.
Michael G. Osborne, an attorney who specializes in antitrust and competition law at Cozen O’Connor in Toronto, says that from a competition point of view, there is a potential issue pertaining to the mechanism wherein brokerages must become members of CREA and TRREB to operate. Essentially, though Broker A and Broker B have no direct written agreement between them, by aligning with an association’s rules they can be seen by the Competition Bureau to be operating under an indirect “hub and spoke” agreement.
How much is at stake in the lawsuit?
Kalloghlian Myers LLP is seeking compensation for anyone who has sold a home since 2010, though they have not yet put an overall dollar value on what they are seeking.
If every transaction covered by TRREB is affected, the sums involved could be substantial.
According to annual sales and average price figures on TRREB’s website, more than $880 billion in residential real estate changed hands between 2010 and 2022. Five per cent commission on those sales would amount to $44 billion, with as much as half going to buyer brokerages.
Can home sellers participate in the lawsuit?
In a class-action lawsuit, individuals who are similarly affected are generally automatically included, meaning there’s usually no need to actively “get in on” the lawsuit. If the ruling is in favour of the class, affected individuals will be notified about their entitlements. The duration of such lawsuits can vary widely, depending on the complexities involved and the legal pathways taken.
Should compensation be awarded, the distribution could take several years.
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