Meet the Cartel
Real estate boards in Ontario form an informal cartel. This isn’t just our opinion, but the conclusion of an academic paper published by Dr. Mark S. Nadel. He is a veteran employee of the US government who published a paper in the Berkeley Journal of Law. The paper itself is an enticing read, but unfortunately does not offer good solutions to the problem. Our own founder has written more about the solution in a medium article titled Meet the Cartel.
We would like to expand on the claims in both papers and drill down into price fixing in Ontario, and in Canada as a whole. There is empirical evidence that shows this price fixing is alive and well. In Canada our informal cartels set pricing structures and standards provincially. Take a look at the structure of fees in each province and the average take on each transaction under the heading "Comparison of Real Estate Commission Across Provinces": https://wowa.ca/calculators/commission-calculator-bc. Notice something weird? Despite BC real estate being on average more expensive than in Ontario, agents in Ontario tend to make more on each transaction.
These prices are detached from any fundamentals. Is selling real estate in Newfoundland and Labrador a third as hard as selling in Toronto? I would argue it is the other way around. Relatively uniform fees and fee structures across a province, and yet different between provinces. In a healthy market there is variance in the prices between offerings, even though there might be an average price. It would be extremely unusual for a price to be nearly uniform in a given market. Similar competitive markets should converge to a similar average price. If they truly are competitive and with similar fundamentals then they shouldn’t settle at different averages. In a market dominated by an informal cartel, after an equilibrium has been reached it is very difficult to change. There is no incentive for any market participant to lower prices, because a buyer’s agent commission is hidden from buyers. They do not properly negotiate it, creating an obstacle to price competition. Since informal cartel prices are already high, there is almost no possibility to raise prices either. A company like Properly claims to provide far more value to a customer compared to a traditional brokerage. Why is it then unable to raise the price of its offering in places in Ontario where 4% commission is the going rate? Because it is not a free and healthy market.
Let us dig into the Ontario cartel's internal commission data. It turns out that while commissions are relatively uniform across the province, they differ slightly between each fief of the cartel. Ontario brokerages are grouped into local and then regional real estate boards, and each one informally fixes prices in the territory it carved out. Here is listing data from June 2021 in two towns in Ontario that are not too far from each other:
a) Orangeville: https://imgur.com/hoEvg69
b) Niagara: https://imgur.com/9lzbDAh
Notice something weird again? Orangeville's are all around 2.5% with 2.25% and 2% being the odd exception. This isn't the entirety of the data of course, and there are a few listings in Orangeville offering 2%. However, the standard going rate is 2.5%. In Niagara on the other hand 2% seems to be the rule. Is it 25% harder to be a buyer's agent in Orangeville than in Niagara? We don't think so.
These eye-watering transaction fees inflate housing for everyone. On an average Ontario house, that is about $37,000. For many people this might be their entire down payment and would have taken multiple years of saving. While the real estate cartel is not the main issue behind the current housing crisis, it is an enthusiastic contributor to it.
It is time to call a buyer's agent commission exactly what it is: extortion. Not in the individual legal sense, but it is hard to differentiate from it. A buyer agent’s demand is an often successful attempt to extract a fee from an unwilling seller. A fee for the pleasure of being negotiated against, and having one’s economic interest actively harmed. There is always the implicit “or else” to the request: if you refuse, a majority of buyers will be steered away and you will suffer even greater harm. The threat is economic damage made possible through the dominant market position of this informal cartel.
This system also creates incentives for agents that are directly opposed to their own buyer client's interests. It is incompatible with fiduciary duties on a macro scale, and any lawyer who tries a similar compensation structure will lose their license. We see people calling for capping commission rates, banning double-ended deals, or making fees flat, but these proposals fail to see the informal cartel structure itself and its vulnerabilities. They also ignore the economics of a monopoly. To fight this monopoly, the monopoly position itself must be torn down and the market will do the rest. The legislative solution is surprisingly simple: mandate that all parties pay for their own representation. When buyers are no longer told the big lie that their agent's services are "free", they will seriously consider how much they will pay them, if at all. No longer would a seller be effectively extorted or risk losing over 90% of buyers. In other countries such as the UK and Australia sold data is freely available, and everyone pays for their own representation. In those countries a buyer's agent is not a thing.
While the legislative solution is to this racket is to mandate that everyone pay for their own representation, it is not the only solution. The decentralized solution is Zero Value Realty.
