As Canadian home prices continue to skyrocket, one common real estate practice is coming under increased scrutiny: blind bidding.
When dozens of interested buyers bid for a property – the norm in most of Ontario in recent months – they typically have no idea what their competitors are offering. Many bidders aim high in hope of beating out everyone else. That means winning bids can be hundreds of thousands of dollars above the next highest offer, driving up prices unnecessarily as excessive bids set new precedents for a neighbourhood.
“If you are not sure you are going to get something and you really want to get this house finally, you may bid way over asking because you lost many houses in the past,” said Nancy Worth, an assistant professor of geography at the University of Waterloo, whose research includes how millennials are coping with unaffordable housing.
The shortage of properties for sale across the country, particularly in small cities in Ontario, has ratcheted up competition and pushed prices up by more than 30 per cent in many areas since the start of the COVID-19 pandemic. Ultralow mortgage rates combined with the pandemic-fuelled demand for home offices and entertainment has sent buyers in search of more room.
Houses in the city of Toronto are selling from $100,000 to $700,000 over the asking price, according to sales data and brokers. Bidding wars, unconditional offers and no home inspections are now common in small cities that have never experienced a market this competitive.
In Barrie, about a 90-minute drive north of downtown Toronto, the price of a typical detached house jumped by nearly $100,000 over three months to $721,000 in February, according to Canadian Real Estate Association (CREA) data. Similarly, detached houses in Kitchener-Waterloo, Burlington and Mississauga have gone up by a minimum of $100,000 over three months. In Milton and Oakville, prices are almost $200,000 more than they were in November.
Barrie Mayor Jeff Lehman says blind bidding is playing a role in the price increases.
“The market failure that can create is one where there is price distortion created by incomplete information, where people aren’t really paying the true value of the house because they are into a bidding war,” he said.
CREA‘s home price index, which adjusts for expensive transactions, has increased by 30 per cent to 35 per cent over the 12 months to February in places such as Barrie, Niagara and the Simcoe area. The index has gained more than 35 per cent in Tillsonburg, Woodstock and Ingersoll.
And affordability looks poised to get worse. As of the end of February, 40 regions across Ontario have less than one month of inventory for sale, according to the CREA. Many small markets have seen inventory below one month since last July, including Barrie, Brantford, Guelph, Hamilton, Burlington, Kitchener-Waterloo, Ottawa, Simcoe, Woodstock and Ingersoll. Cambridge has been at that position since June.
The real estate industry generally favours blind bidding, saying it protects consumers’ privacy and prevents bidders from pitting one offer against others unfairly, while generating the highest price for the seller. But now some real estate agents are starting to agree it is contributing to runaway prices.
“How do we make the blind bidding process more honest and more fair? We open it up. There is no other way,” said Faizel Bhabha, realtor with Exp Realty Brokerage, who sells houses in the Toronto region.
When bidders compete for a house, Mr. Bhabha said real estate agents tell prospective buyers, “Are you really going to walk away for $20,000? If you found out that you lost this $1-million house for $20,000, would you kick yourself in the morning?’”
Desmond Brown, an agent with Re/Max Hallmark Realty Ltd., who sells houses in the Toronto region, agreed that more transparency would slow down price increases. “Sometimes we are seeing situations where the winning bid is $100,000 to $200,000 over the next highest bid. So, in that sense, it would slow it down if it was an open-bid process,” he said.
Bank of Montreal senior economist Robert Kavcic recently raised the idea of opening up the bidding process because other traditional market-cooling measures – higher interest rates and stricter mortgage rules – are not available right now. Mr. Kavcic has urged policy makers to react to what he calls the “boiling” housing market before it gets “dangerous.”
Bank of Canada Governor Tiff Macklem said in February that the housing market is showing early signs of “excess exuberance.” But the central bank’s main policy tool is setting the benchmark interest rate, and the rate has been slashed to near zero to help the economy recover from pandemic losses. After the 2016-17 run-up in prices in Toronto and Vancouver, Ottawa imposed new mortgage stress-test rules requiring borrowers to qualify at a mortgage rate much higher than the market rate – to ensure they could still afford their payments.
That leaves blind bidding as one of a smaller number of policy reforms available as price soar.
One realtor, Katie Steinfeld, set up her own auction company, On The Block Auctions Inc., after Toronto’s overheated market in 2016, when her clients were repeatedly frustrated and upset by blind bidding wars. She said some regretted not going to their maximum price, while others regretted overpaying.
“A lot of people think sellers may be at a disadvantage” in auctions, Ms. Steinfeld said. But at one she held for a semi-detached house in Burlington, there were 60 bids and the house sold for $782,000, higher than the asking price of $620,000.
Ms. Steinfeld said about 15 per cent of her sellers choose the auction process and it is competitive. “It is something that will help [buyers] with their decision if they know all the info ahead of time,” she said.
Provincial governments are responsible for setting laws that govern the bidding process. In the country’s priciest real estate markets of Ontario and B.C., regulators said realtors need to act in the best interest of their clients and it is up to the seller to choose whether they want an open, auction-like process or a closed one. Quebec’s regulator said the seller’s broker must tell buyers if there are multiple offers, but the price and other conditions cannot be disclosed.
Ontario launched a review of real estate practices in 2019 to strengthen transparency and consumer protection, but nothing has changed in the bidding process. Real estate laws fall under the Ministry of Government and Consumer Services. Gillian Sloggett, director of communications for Minister Lisa Thompson, said some existing rules protect buyers in multiple-offer situations.
For example, realtors must present offers in writing and brokerages must disclose the number of competing offers – although not the substance of them – to give buyers some information about the competitive environment, Ms. Sloggett said.
Mr. Bhabha, however, said that is not enough. “If you want to fix the process, mandate it be open,” he said. “You would get lots of resistance from brokers.”
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