Are real estate brokers a cartel?"It's a monopoly, it's a cartel, it's an oligopoly," said Ned Goodman of Dundee Corp. recently of the Big Six chartered banks. The Canadian banking and mutual fund industries get a lot of attention when it comes to cartel-like behaviour, but real estate brokerage services, deserve as much, if not more, in my opinion. That it doesn't get as much attention probably reflects the fact real estate transactions for most people are infrequent. Yet, selling a house will be by far the biggest financial transaction in the lives of most people and the commissions they pay to realtors could end up even larger than the fees paid to banks and mutual funds.Market power in the real estate industry is said to arise from controlling access to the Multiple Listing Service (MLS). If a homeowner wishes the broadest exposure for their house, MLS is the way to go due to its size. But to list on it, they and their agent usually need to agree to abide by conditions that effectively restrict competition among brokers and help preserve commissions in the 5% to 7% range. Let's take the Realtysellers case. A few years ago, this Toronto-based real-estate brokerage won a court case allowing it to offer MLS listings for a flat fee of $695. It seemed like a breakthrough for homeowners and buyers. But Realtysellers is now out of business. Why?
The Canadian Real Estate Association (CREA) responded to flat-fee listings by introducing "minimum service" standards. Under this requirement, agents could no longer post a property on MLS unless they also represented the seller for the term of the contract. This made a flat fee of $695 uneconomical since the selling broker now had higher costs. CREA says it is just protecting the MLS trademark. But others believe the "minimum service" requirement makes it harder for discount brokers to operate and as such, may be anti-competitive. In the latter camp is the federal Competition Bureau. Taking aim at the new MLS listing requirements, it announced several months ago an investigation of CREA records for possible violations of competition law. The trouble with Competition Bureau investigations is they can take a long time. In the case of real estate brokerage Re/Max banning its agents from advertising commission rates, it took the Bureau over three years to complete its investigation (which wound up in 2003).
Furthermore, the Bureau's ruling overturning the Re/Max ban didn't seem to have too much impact on increasing competition and price breaks. True, broker commissions are negotiable between agent and client, but agents operating out of brokerages like Re/Max are charged overhead costs that restrict how much of a discount they can offer, said former Re/Max agent Ian Bailey in a 2003 news report. CREA and other real estate associations might argue they don't control commissions and certainly are not running a cartel. They could be right. But pricing behavior in the real estate industry leaves one wondering. For example, in many Canadian cities house prices have more than doubled in recent years and so too have real estate brokers' prices (thanks to the method of charging through a percentage commission). But has the cost of selling a house doubled in recent years? That seems unlikely. And in hot markets, when realtors have an easier time selling properties, one would expect a more competitive industry would have lower commissions. While house buyers and owners wait for anti-trust authorities to possibly open up MLS, they can find some respite through For Sale By Owner (FSBO) networks like www.grapevine.ca. The cost of an Internet listing with the latter is as low as $200 (higher fees for extras like lawn signs and house appraisals). The home seller and buyer can then agree to split realtors' standard 5% to 7% commission between themselves. Or the seller, as often happens, will receive a buy offer from a real estate agent with a home-buying client (as long as they pay the agent 2% to 2.5%).
