A new report from Smart Prosperity Institute, funded by CREA, says that a ban on “blind bidding” wouldn’t have the desired effect of limiting home price increases, and may actually lead to higher prices. During the recent election campaign, the Liberal Party of Canada said it would ban blind bidding, potentially under the federal Criminal Code.
The Smart Prosperity Institute surveyed academic research into bidder psychology as well as the approaches in jurisdictions where different methods are used to manage multiple offers, such as the United States, Sweden, Singapore, Ireland, Australia and New Zealand.
“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,” says Mike Moffatt, author of the report. “We examined the evidence and found that 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 by both empirical evidence, and economic theory.”
Michael Bourque, CREA CEO, says, “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. This report demonstrates clearly that in countries where bidding is completely transparent (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.”
The report says there will be non-price consequences to requiring details of bids being made available to other bidders – notably the trade-off between privacy and transparency. Should any government ban blind bidding, it will need to consider which details other bidders can access, and which are kept confidential, it says. Other considerations include whether a ban would lead to open-bid negotiation (similar to Sweden) or open auction (similar to Australia or New Zealand).
The report says the form of auction plays a small role in determining the final price of the property. The dominant factors driving price change are supply and demand. Recognizing that Canada currently has the lowest number of housing units per capita across the G7, all levels of government must work together to reduce barriers to increasing housing supply, it says.
The full report, Banning Blind Bidding: Would it Slow the Growth in Canadian Real Estate Prices, is available online.
Key findings from the report:
1. During the election campaign, the Liberal Party ran on a promise to include a Home Buyers’ Bill of Rights that would ban blind bidding, arguing that blind bidding drives up home prices. While the arguments that blind bidding processes cause higher prices are plausible, the evidence, while limited, suggests that increased bid transparency leads to higher, rather than lower, prices in a hot real estate market.
2. Sweden, which does not permit blind bidding, has experienced even faster home price growth during the pandemic than Canada, and comparable home price growth over the last 20 years.
3. New Zealand, where open English auctions for homes are common, has experienced the fastest growing home prices in the world over the last 20 years.
4. The experience in Sweden, New Zealand and Australia suggests that bid transparency can lead to higher, not lower, prices in a hot real estate market.
5. There is limited, though compelling, academic evidence that bid transparency leads to higher real estate prices. Studies examining real estate transactions in New Zealand, Australia and Ireland, as well as studies examining land sales in Singapore and the United States, have found increased bid transparency associated with higher, rather than lower, prices, particularly 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.
6. The rules governing real estate bids likely do play a minor role in the average price of real estate, though this proposed reform is more likely than not to lead to higher, rather than lower, prices. Ultimately, the major factor driving up real estate prices is supply not keeping up with demand. To ensure housing is available and attainable for all Canadians, the federal government should focus on relieving the bottlenecks preventing an adequate supply of family-friendly, climate-friendly homes from being built.
Smart Prosperity Institute is a national research network and policy think tank based at the University of Ottawa.