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How to tame the housing wars: Why open bidding may not work

The idea of eliminating blind bidding from residential real estate transactions is gaining steam among those looking for a quick way to squirt some cold water onto Canada’s sizzling hot housing market.

In B.C., for example, the provincial government is reviewing blind bidding as part of a broader effort to strengthen protections for homebuyers.

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In much of Canada, the volume of homes changing hands has come down from the eye-popping peak set in March. But for every home with a for-sale sign, in many parts of the country, there are still plenty of eager homebuyers, and bidding wars remain common.

But while critics of blind bidding make a straightforward case, it’s hard to tell whether so-called “open bidding” would be any better.

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The case against blind bidding

With blind bidding, homebuyers vying for the same property don’t know how much others are offering. But the specific rules that govern the bidding process vary from province to province.

For example, while buyers in Ontario are entitled to know at least the number of competing offers, brokerages in B.C. currently don’t have to disclose even that information.

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Not knowing how much others are willing to put on the table, critics contend, often creates an incentive for buyers to offer tens of thousands if not hundreds of thousands of dollars above the asking price in what’s commonly known as “bully bids.”

This creates a situation where “you have a bunch of bids kind of clustered around one area and then one sort of crazy bid that’s six figures above the rest,” says Ben Rabidoux, president of North Cove Advisors, a boutique market research firm.

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The way Rabidoux sees it, that’s an undesirable outcome for several reasons. For one, it hurts the eventual homebuyer, who may have been able to purchase the property at a lower price, he says.

Second, the result is often unfair to sellers as well, who might face an equally challenging bidding process when buying their new home, Rabioux argues.

“For the most part, sellers are moving laterally within the market. They’re selling one property, but they’re moving into another property,” he says.

“They then have to get back into just an equally crazy bidding process as well.”

But perhaps most importantly, bully bids have knock-on effects on home prices, as the prices of properties that sell vastly over their asking prices become reference points for future sellers in nearby areas, Rabidoux says.

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But is open bidding any better?

Blind bidding isn’t the only way to let multiple buyers compete in the real estate market. In Australia, for example, homes are often sold through open bidding or so-called auction-style bidding, where buyers try to outdo each other with higher and higher offers.

But while the country’s process has been praised for its transparency, it’s unclear whether selling homes at auction would do much to temper the impact of bidding wars on prices.

For one, Rabidoux notes, “the housing market in Australia is every bit as crazy as it is here in Canada.”

Australian home prices were up 11 per cent in May compared to the same month last year, with the median price of a home reaching $908,000.

Empirical studies of different styles of bidding in real estate markets are rare. But one paper comparing blind bidding and open bidding in land auctions in Singapore found that the latter actually led to higher prices for sellers.

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In a 2014 paper published in Real Estate Economics, an academic journal, researchers Yuen Leng Chow and Joseph Ooi found prices were between one per cent and nearly 10 per cent higher for plots of land available for residential development in the same are of the city-state that had been sold with an open-bidding instead of a closed-bidding process.

(It should be noted, however, that the blind-bidding process described in the paper involves only one round of competing bind bids. In Canada, bidding wars often involve the seller’s agent asking buyers to up their offers if the bid are close or considered too low).

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In Toronto, Davelle Morrison, a broker with Bosley Real Estate, worries open bidding would give buyers even less time to think about what they can really afford.

In Ontario’s current blind-bidding process, buyers may have the chance to place a quick call to their parents, mortgage broker or financial adviser before raising their bid, she says.

In an auction-style bidding war, on the other hand, “you have to make a split-second decision about something that’s the most important and most likely the largest purchase of your life,” she says.

A possible fix: eBay-style bidding

One way to avoid the bully bid may be an automatic escalation clause similar to automatic bidding on eBay, Rabidoux says. On the e-commerce site, customers can set the maximum amount they’re willing to pay and opt to let an algorithm bid on their behalf in increments up to their price ceiling.

It’s an idea some big-bank economists have written about as well. In March, BMO Senior Economist Robert Kavcic mentioned standardized escalation clauses for the price component of bidding offers as a possible measure that could “limit the ballooning that we’re now seeing in a very tight market.”

But on its own, both Rabidoux and Kavcic say, tweaking bidding wars won’t cool the real estate frenzy.

“It is still an extremely tight seller’s market, even with the recent slowdown in sales,” Rabidoux says.

Still, changing the way buyers compete for scare housing may “take some of the extreme irrational froth off the market.”

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