A lawsuit alleging that the real estate brokerage industry inflates commission fees has been expanded to include all of Canada and an expert says it could bring big changes to the housing market.
The class action suit, filed in federal court last month, names 72 different regional real estate boards, 10 real estate franchisors and eight real estate brokerages as defendants.
“The class action is quite substantial and it’s pretty huge,” Walter Melanson, co-founder and market analyst at PropertyGuys.com, told BNN Bloomberg in a Monday interview.
The lawsuit comes after an original suit was filed in federal court in September on behalf of home-sellers in the Greater Toronto Area against the Toronto Regional Real Estate Board (TRREB).
None of the allegations have been proven in court.
The latest price-fixing suit alleges that an unwritten arrangement known as the “buyer brokerage commission rule,” which has become the norm for many residential real estate transactions, violates competition laws.
When a home sale closes, the seller typically pays a broker commission fee, which is a percentage of the entire sale amount. The fee is normally then split between the representatives of the seller and the buyer, and is customarily shared evenly.
This was the case with Milton resident Kevin McFall, the named plaintiff in the class action suit. In the court documents, McFall alleges he sold his home in May and paid a five per cent commission on the sale, half of which went to the buyer brokerage.
The suit claims that this system incentivizes buyer brokerages to direct their clients away from sellers offering lower commission fees, artificially inflating them over time.
“We're talking about rules that drive policies and policies that drive behaviours and behaviours that drive outcomes,” Melanson explained.
Case follows Missouri court decision
The Canadian class action comes on the heels of a similar case in the U.S.
In a precedent-setting October decision, a Missouri court handed down a guilty verdict in a price-fixing lawsuit brought against major U.S. real estate players including the National Association of Realtors and RE/MAX.
The plaintiffs in that case were awarded US$1.8 billion in damages.
“When it comes to Canada, it's the same types of allegations,” Melanson said.
“The lawyers behind this class action are saying that certain rules prevent competition in the buyer brokerage industry, which lead to falsely inflating real estate commissions, so that's really what the focus is.”
Allegations 'without merit': CREA
The Canada-wide class action suit claims that the Canadian Real Estate Association (CREA) helped brokerages facilitate the alleged price-fixing scheme.
The organization says the allegations are “without merit.”
“(CREA) will continue to vigorously defend against these claims,” CREA said in a statement to BNN Bloomberg.
The association claims its listing system are “efficient and effective cooperative marketplaces that bring together realtors acting on behalf of Canadian home sellers and buyers, and are both pro-competitive and pro-consumer.”
After the Missouri court decision, Melanson said “copy cat” class action suits have been filed across 11 U.S. states, with the potential to exceed US$100 billion in damages.
Decisions in U.S. courts will likely influence the behaviour of realtors in Canada, Melanson said, noting that many brokerages are already changing their commission rules to de-risk their businesses in the long term.
“It really depends what the folks that are involved in the American suits want to do here in Canada, but we hope that any change is good for consumers,” Melanson said.
He noted that some analysts have estimated that real estate commissions in Canada could come down as much as 30 per cent as a result of the legal action.
“Those are the types of things we'd love to see in the market,” Melanson said.