The Smart Prosperity Institute recently released new findings that challenge whether a ban to blind bidding on homes would slow the growth of prices.
The report, which was funded by the Canadian Real Estate Association (CREA), concluded that blind bidding “does not ultimately drive up home prices, and requiring open bidding in a hot real-estate may lead to higher, rather than lower, home prices.”
An end to blind bidding was one of the components of the Liberal Party’s Home Buyers’ Bill of Rights that was proposed during the September federal election. Without knowing what other buyers are bidding on a property, this practice “ultimately drives up home prices,” the campaign stated.
However, the CREA-funded research pointed out that the policy was unlikely to reverse rising prices based on empirical evidence and economic theory cited in the report.
“Canadians need climate-friendly, family-friendly housing that they can afford in the communities in which they work. While federal policies are vital to meet this goal, banning blind bidding is unlikely to have much of a positive effect,” said Dr. Mike Moffatt, the author of the report, in a press release.
The Smart Prosperity Institute’s report explained that Sweden, which requires real estate bids to be open, has “experienced some of the fastest-growing real-estate prices in the last 20 years.” A similar situation has also been observed in New Zealand and Australia, where open bidding via auction is common practice while prices in these countries have “risen dramatically.”
Studies on residential real-estate sales in Ireland, along with land sales in the United States and Singapore, also associated increased bid transparency with increased average sales prices, especially in overheated markets.
“This could be due to several factors, including public bids creating a signal that a property is particularly valuable, in a way that less transparent bids do not,” said the report.
In a blind bidding scenario, the report explained that since buyers are unable to see the offers being made by other bidders, they may submit high bids, “just to be safe.” The lack of transparency would therefore be argued as a cause for buyers to panic and overbid. On the contrary, the report suggested that open bidding can also create “frenzied market psychology,” which causes final bids in open auctions to be even higher compared to closed bidding.
“That is, instead of taming out of control market psychology, transparency adds fuel to it,” the report stated.
The think tank’s report also pointed out that there would be “non-price consequences,” to putting an end to blind bidding, such as “trading-off of privacy for transparency.” If the federal government were to move forward with an blind bidding ban, they would need to consider which details would remain private and which would be available to other bidders, the report explained.
“REALTORS® have been telling us for years that ‘how’ offers are made is not the primary factor driving Canadian home prices higher, it is simply there’s more demand than available properties,” said CREA CEO Michael Bourque in a press release.
“This report demonstrates clearly that in countries where bidding is completely transparent (e.g. open auctions), price increases are greater than those recorded in Canada. The solution is to build more homes that buyers want, as soon as possible,” he added.