So you want to buy a home, but the problem is the market has been so incredibly busy. We've seen the prices run up month over month with bidding wars and incredible amounts of offers on properties, which makes your task of buying a home, really difficult. So what's the solution? Well, the Liberal government said when they were running for reelection in 2021 that they wanted to put a ban on blind bidding. So let's get into what blind bidding is, what's been done all over the world and how other countries handle blind bidding, and we're going to get into this report by the Smart Prosperity Institute all about studying the effects of blind bidding in different countries, especially during the pandemic.
In their 2021 election platform titled: Forward for Everyone, the Liberal Party of Canada proposed the introduction of a home buyer's Bill of Rights. The proposal basically stated that buying a home needed to be fair, open, and transparent, which included banning blind bidding. Blind bidding prevents bidders from knowing the bids of other prospective buyers and ultimately drives up home prices, or so they claim In a hot real estate market, such as the one experienced in many parts of Canada during the Pandemic, where most properties have many, man interested buyers, a negotiated sale becomes a form of a closed bid auction, where the house goes to the buyer who places the most attractive bid.
Auctions can take on many forms and have many characteristics. And there are really two characteristics in the report in particular that are relevant to the Canadian real estate market. The first is endpoint flexibility and the other transparency. With the Liberal government proposal focusing on transparency but not the endpoint flexibility.
Endpoint flexibility refers to the ability of the seller to wait for additional bidders to arrive or negotiate with existing bidders to achieve better terms, transparency refers to the amount of information bidders receive about other bidders that are participating in the auction. For the open bidding argument, the most common form of an open bidding auction is typically referred to as an English auction. And an English auction, bidders are made aware of the relevant details of the bids made by the other potential buyers. They're also allowed to alter or increase their bids in response to the bids placed by other participants in the auction. There are very few markets in the world that have outlawed blind bid negotiations in the real estate market, with Sweden being a notable exception where the bids are required to be open. Outside of Sweden though, most other countries use a combination of blind bid negotiation, open bid negotiation, and open English auctions to sell their homes.
Although open English auctions are somewhat rare in Canada for real estate, other Commonwealth countries like Australia and New Zealand use them quite frequently, although the majority of homes in Australia are still sold also by the blind bid negotiation process. The argument that blind bidding leads homebuyers to overpay for houses driving up market prices is relatively straightforward to understand. The short version of that is that if bidders do not know what the other potential buyers are bidding, then the gap between the highest and the second highest bid may be quite large. And had the winning bidder known what the competition was bidding, they could have ended up winning the house for well, a much lower offer price.
As an example, because of the lack of transparency, the winning offer may be thousands of thousands of dollars more than it needs to be because there's no disclosure of what the others may be offering. Since buyers are unable to see the offers being made by other bidders, they may place needlessly high bids just to be safe. The lack of transparency creates market psychology that causes some potential buyers to panic and overbid. This is called the bid gap argument, and that is how the argument goes.
A counterargument is that open bidding can also create frenzy market psychology, and that can cause final bids and open auctions to be even higher than the enclosed bidding. That is, instead of taming ouof control market psychology, transparency actually adds fuel to it. While a large gap between the highest and second highest offer in a blind bid auction may suggest that the winning bidder is overpaying, the truth is a little more complicated than that.
One obvious source of complication is we do not know how much the non winning bidder would have increased their offer had they been able to see those bids made by the winning bidder. So often do I see a buyer lose in a multiple offer situation only to learn about how much the winning bid price was.
In this example, almost every time the buyer will say to me, "Well, I would have paid that amount for that home.” However, they didn't get it because they didn't choose to bid a price that high, they bid lower. But in an open bid auction like this, it's very easy for the buyer to see the finish line and thus increase their bid to try and get the home.
The problem with this, however, is now the other party also will have an opportunity to increase their bid. In short, the bid gap argument overlooks the fact that in an open bidding system, you see lower ranked bidders likely continue to raise their bids if they can observe the amounts being offered by the leading bidder.
Skeptics of the presumption that the open bidding style auctions necessarily lead to lower prices. Also note that in countries where open bidding auctions are common, residential real estate prices have risen just as fast, if not faster than Canada. In Australia, New Zealand, Ireland, and Scotland, open bid auctions are relatively common, and it is noteworthy that open bid auction formats are particularly popular for sellers during boom periods, likely due to a belief among sellers that that may lead to higher prices negotiated in a hot real estate sales market.
In comparing the countries showing the markets with open bid negotiation and open bid English auctions, they are also experiencing substantial price increases in the second half of 2020 and the first half of 2021. Canadian real estate prices have risen by an astronomical 16%, according to data from the Knight Frank Global Price Index. However, their data shows that Canada’s price appreciation is the only 8th highest in the world over the last 12 months and is behind both Australia and New Zealand, where open English auctions are the norm, and Sweden, where blind bidding is not permitted and a system of open bid negotiation is used.
Furthermore, we can take a longerterm view and examine price increases over the last 20 years. The Global House Price Dashboard from the magazine The Economist finds that in the 20 years between Q2 of the year 2000 and Q2 of 2020, that New Zealand had the fastest growing real estate prices on the planet in terms of any advanced economy, with Canada coming in 2nd and then Sweden and Australia taking 3rd and 4th spots.
Norway, a country where almost all existing homes are sold by open English auction, has also experienced substantial price appreciation. While Canada has experienced some of the highest real estate price growth in the world, New Zealand, where open bidding for homes is common, has experienced even faster growth and price growth. In Sweden, where open bidding for homes is mandatory, has experienced faster home price appreciation than 6 of the 7 countries in the G7.
There's also a concept in economics literature known as revenue equivalents, which is the idea that the outcome of an auction is independent of the format of that auction and how it takes, and some analysis have picked up on this argument. An example would be a CBC piece examining the Liberal commitment to end blind bidding, titled Fact Checked.
Would a blind bidding ban lower house prices? Which came to the conclusion that blind bidding is unlikely to drop housing prices significantly, citing revenue equivalents. Revenue equivalent holds in the real world that any bidding reform designed to lead to change average prices is doomed to failure. The goal of this paper was to answer a straightforward question, does blind bidding ultimately drive up home prices as claimed and with a ban on blind bidding lower or at least slow the growth of home prices? Based on the evidence, blind bidding does not ultimately drive up home prices and requiring open bidding in a hot real estate market may lead to higher rather than lower home prices. This is supported both by empirical evidence and economic theory.
Ultimately, while the form of the auction likely plays a small role in determining the final price of the property in the dominant factors driving price changes are supply and demand. If the federal government wishes to ensure housing is available and attainable for all Canadians, it must focus on Canada's lack of supply.
In a note published by ScotiaBank, in 2021, it noted that Canada has the lowest number of housing units per capita in the G7, and we need an additional 1.8 million housing units to reach the G7 average. This also doesn't take into account what is happening with our ultra low interest rates, all while inflation is absolutely running out of control, all the investors putting money into the market and how we tax the purchase and resale of residential properties in Canada.
Ultimately, Canada is an incredible place to live, and perhaps we just need to get used to the fact that lots of people want to live here. Putting a ban on blind bidding may not be the solution we're looking for. To check out the full report mentioned in this video, check out the download section below.
I'm Darin Germyn with the Germyn Group. Let us know what you think might help tame the incredible real estate market that we have been experiencing. I appreciate you watching and we'll see you next time.
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