The power of the Internet was going to shatter the grip that realtors have on house sales in Canada, driving down commissions and empowering consumers.
The Internet failed.
The Competition Bureau waded in to overcome the industry’s stasis, attempting to create a market where consumers pick which services they want and data are more widely available.
But, so far, it’s accomplished little.
In a country where grousing about bank fees is a national pastime, where a 5-cent rise in gasoline prices sparks outrage, one fee remains remarkably static: the thousands in commissions paid to real estate brokers. Technology has failed to snap consumers out of their complacency, and regulatory efforts to force the industry to make it easier for new Web-based firms to compete have been abortive.
But there is a new threat to the status quo that could be the catalyst for industry-rattling change: the housing slowdown.
Canadian house prices were generally on a tear from the turn of the century until last year, with most sellers still netting a tidy profit even after paying commissions. But that growth has now begun to taper off, with year-over-year price increases slowing from more than 6 per cent at the outset of last year to less than 3 per cent at the outset of this year (and some markets, such as Vancouver, seeing outright declines).
Economists suggest that the market could be entering a lengthy period in which house prices remain essentially flat. Toronto-Dominion Bank’s economists recently estimated that the nominal annual rate of return on real estate will be about 2 per cent over the next decade. In other words, the rise in home prices will just keep pace with inflation.
And that means that homeowners who buy and sell homes in the next 10 years will not be making the profits that homeowners who bought and sold in the past decade got used to. More commonly, sellers will be accepting prices that are much closer to what they paid.
John Andrew, a professor at Queen’s University, suggests the following analogy: When the stock market is rising and you’re making money, then you don’t mind paying a broker a fee, but if you lose money on your investment, then the charges will be upsetting.
The market dynamics are changing at a time when new real estate startups, which are largely Internet based, are becoming more innovative. “There is no question that commissions are very high, and there is a big consumer pushback against that,” Mr. Andrew says. “It doesn’t make sense to me that it be a fixed per cent, and perhaps it’s time to begin to look at more of a sliding scale like we have for the land transfer tax, like we have for the income tax.”
Realtors’ commissions are negotiable, and industry sources say the current average commission in the Greater Toronto Area, as an example, is between 4 and 5 per cent. Commissions tend to be higher in rural areas than in major cities, and in many parts of Canada they are often lower. In Western Canada, sellers often pay a two-tiered rate that is closer to what Mr. Andrew would like to see, such as 7 per cent on the first $100,000 of sales value, and 1.5 per cent on the balance.
Over the course of the past 12 years, a period in which house prices rose at an astonishing clip, the average resale price of a house in Toronto roughly doubled, while commissions remained around 5 per cent (that commission gets split between the buyer’s agent and the seller’s agent). That means the average total commission rose from about $12,160 in the year 2000 to $24,950 last year. Price increases have been steeper in some other parts of the country. If you take 5 per cent as a basic commission, Calgary saw commissions on an average sale rise to $20,620 from about $8,820 during the same period and Vancouver saw them increase to $36,500 from $14,800.
Change comes slowly
The stakes are high. Real estate agents took in an estimated $8.26-billion in commissions across the country last year (based on a 5-per-cent rate), up from $3.96-billion 10 years ago, reflecting both an increase in the value of home prices and the number of sales.