Hot housing market turns realtor incomes inflation proof

It’s impossible to ignore how much more money per transaction realtors stand to earn now compared to 20 years ago.Justin Tang/The Canadian Press

With the cost of everything from potato chips to gasoline to housing going up, most workers are unlikely to see wages rise as quickly as the rate of inflation. But there’s at least one group that has seen incomes outpace inflation: real estate agents.

Realtors across the country have raked in billions of dollars in commissions in 2021.

“I think everyone is experiencing a bit of inflation woes; in our industry that’s one thing where we’re very fortunate; we don’t experience inflation as other industries do,” said Amy Leong, an agent with Engel and Volkers Vancouver. Simply put, when home prices race upwards by 26 percent in a single year (as Canada’s national average did in 2021), most realtors’ cut rises in lockstep because their compensation comes through a commission that is a fixed percentage of the selling price.

How much commission realtors take on the average sale can be difficult to nail down: In some markets 5-per-cent split between buying and selling representatives is normal, in others it averages closer to 3 percent and in some cases it can be as as high as six or seven. A small number of deals are from flat-fee or no-commission sales by owner services as well. Phil Soper, president and CEO, Royal LePage – Canada’s largest national broker brand with 22,000 agents – said, according to his numbers, 2021 the average commission was likely 4.1 percent.

“Over the decades [commissions] tend to fall about five basis points a year: 20 years ago they were 5 percent, and 20 years before that were 6 percent,” he said.

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According to the Canadian Real Estate Association there were 666,995 home sales in 2021, for a total dollar volume of $481.1-billion. Assuming each one of those transactions had an average commission of 4 percent realtors, stood to collect as much as $19.2-billion.

In a sellers’ market that sees value surge, there can be pressure from owners for realtors to shave a few points off to secure a listing.Fred Lum/the Globe and Mail

However, according to Mr. Soper those dollars are not spread equally among realtors.

“Incomes don’t tend to rise linearly with home prices, it’s one of the sad facts of the industry,” he said, referring to statistics that have shown that thousands of agents will sell one or fewer houses a year. Competition is harder too, with 150,000 licensed realtors in Canada today compared to maybe half that two decades ago. A buyer’s agent in a hot market could take clients out to 13 showings and offer days but only win one of those bidding wars, meaning the other 12 times were hours they weren’t paid for.

“If you’re very good, the top of the business, 2021 would have been a record year for you,” Mr. Soper said. “The industry overall didn’t see the kind of windfalls you might think.”

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But even on a single transaction, the amount of money at play can be enormous compared to the recent past. As a random example, 9 Waxwing Place, a four-bedroom house on a ravine lot in the Don Mills neighborhood of Toronto, sold in 2004, 18 years ago, for $635,000. That was double the 2004 average single-family home price of $315,231 according to the Toronto Region Real Estate Board. In a typical deal struck in 2004, the 5-percent commission would have been split between the buying agent and the listing agent, each taking a share of $31,750.

In February, 2022, the house sold again for $2,050,000 (the average detached house in Toronto sold for $2-million in February) which meant if the two agents were able to secure a 5-percent commission they would split $102,500. In sheer dollar terms that’s 222-percent higher (adjusted for inflation, its 125-percent higher).

In 2004, TRREB recorded 83,501 sales for a total dollar volume of $26.32-billion, so if the average commission was 5 percent, realtors divided up about $1.3-billion in commissions.

In 2021, TRREB now sells across a larger area and the volume of sales topped 121,712 for a total dollar value of $133.3-billion. If we accept that the average commission is now 4.1 percent, that’s $5.4-billion in commissions – a 315-percent growth over 18 years. If that figure was averaged out across all 66,000 TRREB members it would equal $81,000 in income each.

In a sellers’ market that sees value surge, there can be pressure from owners for realtors to shave a few points off to secure a listing. “It’s like if you’re doing video for weddings, there’s always a cousin who’s going to undercut and do it for $200. People tend to commoditize our service,” said Jeff Lee, a broker with Engel and Volkers Montreal. But he also notes there are sellers who think they can do just as well with a flat fee or zero commission service, but who will often come back to him in the end. “When they don’t sell, they call us after that,” he said.

Still, commissions don’t seem to be falling off a cliff: out of 8,150 current listings in TRREB there were only 59 that showed a co-operating commission percentage that started with one.

Indeed, if anything, a case could be made that the top agents are worth much more than the 4 or 5 percent, particularly if there are other realtors making the same rate who offer less value.

“I have a process refined over 18 years, I spend a lot of money on my listings,” said Dave Fleming, a broker with Toronto’s Bosley Real Estate Ltd., who says costs such as marketing and staging can add up to tens of thousands. of dollars. “I had a client. I said, if you put $50,000 in you’ll get $250,000 out of it. We listed for $1.4 million and ended up getting $1.6 million. It took five weeks, and I didn’t charge them any more: that’s the value they got.

“I had another guy who said, ‘I’m not paying you five percent, I don’t need your frills… just sell my goddam condo.’ I said, ‘I’m not the agent for you.’ The crazy thing is, it’s not about me; I’m trying to make the most money for you,” Mr. Fleming said.

There is also earnings risk in real estate: agents are not salaried, they depend on the number of sales they can close, and there is no guarantee from one year to the next that they will be able to maintain a similar deal flow.

But it’s impossible to ignore how much more money per transaction realtors stand to earn now compared to 20 years ago. In the same period between the Waxwing Place sales (2004-2021) the average hourly wage in the rest of the Canadian economy went from $18.50 to $30 according to Statistics Canada. These numbers are not inflation-adjusted, but that’s 66-percent growth. Even the highest wage employment sector – utilities workers – saw just a 78-percent increase.

And even if that pales in comparison to the per transaction growth (222 percent) from an example like 9 Waxwing, Mr. Soper argues that the right frame for thinking about soaring commissions of 2021 comes from agriculture.

“If you’re a farmer and you have the perfect combination of rain in spring and dry weather in harvest, you can have a bountiful crop… but you’re going to work your ass off,” he said.

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