Ontario real estate regulator needs overhaul

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With hundreds of billions of dollars invested in housing transactions, consumers and others should expect effective and robust regulation of the real estate sector, but a recent Auditor General of Ontario (AGO) report concluded quite the opposite.

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The AGO report said the Real Estate Council of Ontario (RECO), the agency responsible for regulating the provincial industry, is not fulfilling its mandate to protect the consumers’ interests. “The activities RECO performs … are not always effective and timely,” it concluded.

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RECO was established in 1997 to promote a “fair, safe, and informed real estate market for consumers in Ontario through effective, innovative regulation of those who trade in real estate.” More than 78,000 salespersons and 20,038 brokers ply their trade with the 3,876 brokerages in Ontario, numbers that should make regulating them all a top priority for RECO.

RECO’s duties are supposed to include regular inspections of brokerages and thorough investigations of complaints against salespersons and brokers, but the AGO found severe gaps in the performance of both those duties. For example, RECO did not conduct an on-site inspection of 62 per cent of the brokerages in the five-year period from 2017 to 2021. Some brokerages have never been inspected.

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The AGO’s audit of RECO’s data also showed that 88 per cent of the 2,643 complaints of alleged violations during the same period were summarily closed without a follow-up or an escalation to the investigation department. Similarly, RECO did not conduct a follow-up on 599 non-compliance notices sent to 491 brokerages issued for not remitting unclaimed consumer deposits to RECO.

RECO imposes fines for those found guilty of fraudulent behaviour, but they appear to be an insufficient deterrent. The average fine was $8,273, which is significantly less than the average commission earned on a residential transaction in large cities. It is estimated that 67 per cent of the violators that were fined were not required to take any remedial measures, such as further training or education.

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The primary reason for the mismatch between penalties and commissions is that RECO cannot determine what salespersons earn from any fraudulent behaviour.

And what about RECO’s responsibilities to prevent criminals from entering the real estate brokerage business? Surprisingly, RECO does not refuse to register individuals with past criminal convictions.

Similarly, Humber College, the institution that administers mandatory training and courses for aspiring realtors, reported 356 cases of large-scale deliberate and organized academic misconduct during examinations conducted in 2021, but not much was done by RECO to investigate them.

The AGO report is thorough in most instances, except for its concerns about money laundering in the real estate industry. The report speculates money laundering might be taking place and recommends actions to curb it, but a better approach would be to investigate any incidences of money laundering rather than speculating about it.

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As a regulator, RECO should also be proactive in protecting consumer rights, such as buyers being forced into blind bidding when multiple bids are placed for the same property. Many buyers end up paying tens of thousands of dollars, if not more, over the second-best offer, which has contributed to house-price inflation. Yet not much has been done by RECO to strike a balance between the rights of buyers and sellers.

RECO’s mandate is to regulate Ontario’s real estate sector, but it lacks the processes to deliver. For example, even though a 2014 regulation requires brokerages to keep all copies of written offers (bids) for a year, RECO does not collect data from brokerages to identify any fake bids, nor how much a homebuyer paid above the second-highest bid.

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As a regulator, RECO should collect all transaction-related data, including the contents of multiple bids, from brokerages for independent analysis to investigate accusations of irregularities and misconduct. If it did, RECO could share data-driven insights with the province to help improve legislation safeguarding the interests of buyers and sellers alike.

RECO falls under the purview of the Ministry of Public and Business Service Delivery, which should constitute a task force to oversee compliance of the dozens of recommendations AGO has made to address RECO’s shortcomings.

Real estate, especially housing, now constitutes a much larger share of the economy than in the past. Therefore, effective, independent and robust regulation of housing markets is a must to avoid a future great financial crisis, whose origins were in poor oversight of the housing sector in the United States.

Murtaza Haider is a professor of real estate management and director of the Urban Analytics Institute at Toronto Metropolitan University. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-Moranis Bulletin website, www.hmbulletin.com.