Why are house prices in Toronto continuing to soar? They were up 31 percent in the year to April. Some point the finger at foreign buyers, shifting their attention from Vancouver after the BC Provincial government imposed a special tax to cool the market there. Some blame domestic speculators. Some blame a lack of supply of new homes, which is in turn attributed to zoning regulations. And underlying all of these is the rock-bottom interest rate policy still adhered to by the Bank of Canada, almost a decade on from the financial crisis.
There's another culprit that doesn't get much mention, but maybe should: the machinations and sheer venality of realtors. Time was, a seller would hire an agent and put the house up for sale at a price that was realistic or maybe slightly ambitious. The realtor would put the home on the Multiple Listing Service (MLS) so that other realtors could have a crack at selling it for a portion of the commission. Then a buyer would come along with an offer at or maybe below the asking price, there'd be a bit of to-and-fro'ing, and a deal would be struck.
That's still how it goes in much of the country, but in Toronto the system has been turned on its head. Homes are now routinely listed at a price well below what the seller and realtor hope to achieve. A fixed date is set for bids to be tabled. On the specified date, the realtor and seller review the bids and strike a deal with the highest bidder. Here's the thing: none of the bidders knows what anyone else is prepared to pay. It's quite possible to outbid the next best buyer by tens of thousands of dollars, and hence end up paying far more than the seller would in fact have been prepared to settle for.
It's self-evidently a wildly unfair approach, but is there a better alternative? Today's Toronto Star suggests one: the open auction system used in Australia, as explained by a former Australian realtor now living in Canada. The system basically sees a short marketing period for the house that's being sold, after which interested buyers assemble, customarily at the house itself, and bid openly against each other until a winner emerges. It's all transparent and sensible. It would not necessarily prevent house price bubbles, especially in an ultra low rate environment, but it would ensure that buyer and seller in each transaction entered into the deal with full information to hand.
The Star reporter asks the Aussie realtor an obvious question: why hasn't Canada moved to a more open auction system? The reply in part: "It's a bit of a head-scratcher for people here. It's agents that don't get it as much as anything". Oh, the agents get it all right, and the key thing that they get is revealed in response to an earlier question: "The seller pays the agent a percentage -- usually 0.5 percent to 1 percent -- of the anticipated value of the home to market and stage the property and hold open houses".
"0.5 percent to 1 percent"! Real estate commissions in Toronto are customarily in the area of 5 percent -- which, considering how little effort is needed to sell a home in the city these days, is money for nothing. It's no wonder the number of real estate agents in Toronto has been expanding rapidly in recent years, and it's no wonder that the industry strenuously defends the flawed system that's in place.
When I returned to Canada a few years ago, I met a local realtor at a social function and got talking about the recent sale of our home in the UK. The realtors there had compiled and published a colour brochure on the property in less than a day and sold the property, after two competing offers, in three days flat. And for this we were charged a fee of 1.25 percent. I thought the Canadian realtor was going to stuff a canape down my throat to make sure nobody else heard that. Low fee realtors exist in Canada, but they never make much inroads against the established big boys of the industry. Aussie rules would be a good idea, but is a change a'gonna come? I highly doubt it.
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