Ending Real Estate Self Regulation Boosts Transparency

Commentary, Regulation, Wendell Cox

British Columbia Premier Christy Clark recently announced that the days of self-regulation are over for the real estate industry. The Real Estate Council of B.C. had previously been tasked with ensuring that people who are buying and selling homes in the province are fairly treated.

People had been questioning whether self-regulation was effective in B.C.’s hot housing market, especially after reports of dubious practices. These included incidents of so-called shadow flipping, where a real estate professional ends up selling a house for more than the seller initially agreed to sell it for, but the seller does not receive more cash as a result. Public scrutiny led to an independent review that culminated in the publication of a critical report and subsequent announcement.

The difficulty with self-regulating bodies such as these is that there is an inherent conflict of interest. People who are in a position to benefit financially from questionable practices are being tasked with protecting the public from such practices. B.C. MLA David Eby described “a culture of protecting Realtors instead of protecting the public.”

On the other hand, a touted benefit of self-regulation is that people within the industry understand it better than a bureaucrat or elected official and can therefore regulate it more effectively. In theory, real estate agents would benefit from the council strictly policing its members, as doing so helps uphold the reputation of all professionals in the industry.

Based on the evidence of ineffective regulation, the B.C. government likely moved in the right direction by handing authority over to what will be the Superintendent of Real Estate.

The report noted that transparency is “fundamental to credible consequences and public confidence” and expressed concerns about the “closed nature” of local boards’ disciplinary processes.

Now, the penalties for misconduct are increasing from $10,000 for an individual to a whopping $250,000, and from $20,000 to $500,000 for a brokerage. In part because house prices have risen so significantly in the province, the previous penalties were not a strong enough incentive to prevent wrongdoing, as the gains in commission obtained through misconduct could be more than the maximum penalty, making the penalty “a cost of doing business.”

Furthermore, among other things, “dual agency” is now being put to an end, which was previously allowed in limited circumstances. There is an inherent conflict when an agent represents both sides in a transaction. As a buyer or seller, it is difficult to know whether a dual agent is prioritizing your best interests or the best interests of the other party.

Outgoing superintendent Carolyn Rogers described the recent developments as “a cautionary tale – because there are other industries out there that self-regulate. It is a privilege, not a right.”

Alberta also has a very similar arrangement to B.C.; its industry is self-regulated by the Real Estate Council of Alberta (RECA). In November 2015, RECA asked for a third-party regulatory performance review. While the review’s results were cast in a positive manner, it still provided important recommendations, many of them related to transparency. It also recommended reviewing whether the penalty amounts in Alberta are at an appropriate level. Hearing panels may order industry professionals to pay fines up to $25,000, while administrative penalties range from $500 to $5,000.

Stakeholders in Alberta, including real estate professionals, consumers, and the government, should be paying attention to what is happening in B.C. and consider what it means for themselves or this province.

But to be clear, the public scrutiny of B.C.’s real estate sector has largely been in response to concerns about exorbitant house costs, and moving away from self-regulation is not likely to have an impact on the high cost of houses, except perhaps in a few limited cases where shadow-flipping inflated the cost of a house.

This op ed was originally published by The Edmonton Journal on Friday, July 29, 2016: http://edmontonjournal.com/opinion/columnists/opinion-ending-real-estate-self-regulation-boosts-transparency