You may have heard about the Liberal government’s plan to ban blind bidding. But is it a good thing, or a bad thing? Today we’re looking at Blind Bidding vs Open Bidding.
Let’s imagine a scenario. You are in the market to buy a house. You have made an offer on one home that you absolutely love. Then, another buyer makes an offer on the same property. You’re excited and hope to win the bidding war! But the other buyer, not knowing what you’ve bid, has offered way over the asking price and blew your offer out of the water. But what if this happens to you again? This time, ten other buyers make offers on your next choice of home; each anticipating high bids and they all ask way over asking. The next thing you know, the property sells for 50 grand over asking and you’re left feeling defeated.
This isn’t a hypothetical; in cities like Toronto, you’ve probably heard in the news of homes selling for over half a million dollars over asking. This leads to frustrated buyers bidding way over asking on the next home of interest.
Another thing to consider is that Realtors use comparative market analyses to help determine listing prices. If a similar property in a neighbourhood sells for more, it increases the value of the other homes too, driving their prices up. This frustrates buyers and makes it harder for millennials to break into the real estate market.
These are some of the cons of blind bidding. But what are the pros? First, under regular market conditions, blind bidding is good for sellers as it saves sellers money by eliminating lowball offers. When buyers don’t know how much others are bidding, they tend to ask closer to or above the asking price.
Blind bidding also can make the process faster. Since sellers typically review offers in one meeting where all offers are presented, there are fewer changes buyers can make and thus fewer appointments and time spent.
Canadians have watched real estate prices skyrocket across the country, and the government has explored ways to deal with bidding wars that drive prices up. This is where the idea of open bidding comes in and it’s what the Liberal government has pledged to implement.
So, what is open bidding? Open bidding is exactly what it sounds like; those making offers are able to see what has been offered by other parties.
When all parties are aware of what has been bid and have the ability to adjust their bid, the process of home buying becomes an auction. With bids, and changing bids multiple times from multiple parties, open bidding can make the buying and selling process chaotic and more time-consuming. Open bidding can lead to intense bidding wars too, which can creep the price up massively.
According to research conducted by the Smart Prosperity Institute, with funding from the Canadian Real Estate Association (CREA), a ban on blind bidding might actually force prices even higher.
Critics say the lack of transparency inflates offers, with people pledging increasingly higher amounts of money to beat out the competition.
The Institute looked at housing markets in Australia, Sweden, New Zealand, Singapore and the United States to come up with its findings, and concluded that in overheated markets, transparent bidding actually led to higher home prices.
Sweden is a prime example. The country doesn’t allow blind bidding, but during the pandemic, prices rose faster than in Canada — climbing 17.2 per cent versus our 16 per cent.
Australia and New Zealand, where many people buy homes via open auction, thus knowing what other people are bidding, have also seen prices skyrocket. Prices rose 16.4 per cent in Australia and 25.9 per cent in New Zealand over the past year. Studies of land sales via open auctions in the United States and Singapore also show higher prices, the report says.
So what’s going on? Report author Dr. Mike Moffatt says such auctions might create a signal that a home or parcel of land is “particularly valuable,” which fuels higher bids so potential buyers don’t miss out.
Moffatt says open auctions can lead bidders into a game of “one-upmanship,” leading to higher offers when they see how much others are pledging.
“The price of the house may end up being higher than it would be under blind bidding, as each bidder thinks, ‘If I’m willing to pay over a million dollars for this house, what is an extra $2,000 or so?’,” Moffatt writes in the report.
Such “open English auctions,” as seen in Australia and New Zealand, ultimately work in a sellers’ favour, the report says, with price trumping everything else. That means buyers who need to make conditional offers end up being shut out.
All the evidence points to open bidding, not blind bidding, driving higher house prices, the report concludes.
CREA says the report’s findings correlate with what real estate agents see out in the field.
As things return to normal it seems reasonable to expect the bidding process will be less like the wild west and become calmer as it had been for decades. If this change goes through, we simply can’t predict what will happen in the market. Anyhow, we’ll be staying tuned to keep you informed.