The rules that govern the sale of real estate in Canada need to be reformed. When a system is pushed to extremes, its failings, once easy to ignore, become obvious.
Housing prices are surging nationwide. In the Greater Toronto Area, the average home selling price has rocketed 33 per cent higher, to $1.1-million, from a year ago. This wild surge has exposed an industry that for too long has relied on secrecy, questionable marketing techniques and inflexible fees.
There is a growing call for reform. Last month, Toronto-Dominion Bank chief economist Beata Caranci called for a review “to ensure that a seller’s market doesn’t turn into a runaway market due to practices that can jawbone buyers, like price-baiting or gaming the lack of transparency on the bid process.”
The biggest issue in the current market is a lack of transparency, in the form of “blind bidding.”
That’s where multiple bidders going after the same home are kept in the dark about the offers made in competing bids. It’s standard practice.
At the most fundamental level, this system is unfair. At a typical auction, or in the stock market, a bidder knows what the other bids are. It’s basic information that all bidders deserve, because it allows them to pull out of an auction when the price goes too high for their budget.
Yet in real estate, governments allow the industry to keep bidders blindfolded. When things are calm, no one notices; a property may attract only one or two offers. But in the madcap market of this year, blind bidding has pushed buyers to consistently bid over the asking price.
In some cases, the practice has caused desperate buyers to bid hundreds of thousands of dollars over the asking price, skewing the entire market.
In late March, when economists at the Bank of Montreal urged policy makers to act to temper the housing market, they said the elimination of blind bidding would be straightforward to implement, and wouldn’t have ripple effects.
“While this won’t cool the market on its own,” they wrote, “it would limit the ballooning that we’re seeing now in a very tight market.”
Governments need to rewrite rules for real estate deals to require that all bidders know key details about competing bids. As the BMO economists said, such a move won’t necessarily calm Canada’s current market, but it would ensure that more and better information is available to buyers in future, whether markets are cool or hot.
A second potential change would be a tightening of the rules around list prices.
A popular marketing practice in a hot market is for agents to list a home for notably less than it’s worth. The goal is to stoke a blind bidding war.
A recent Globe and Mail story cited an Ontario man who put in an unconditional offer to pay list price for a home. It was rejected. The list price wasn’t actually the price; one could say it was a fake price. “How is this legal?” asked the man in a complaint to the Real Estate Council of Ontario.
His question is a good one. When the advertised price isn’t the real price, there is something wrong. A rule could be made that an unconditional offer at the listed price must be accepted in the absence of other offers.
A third issue is how real estate fees inflate the costs of transactions.
Agents earn their wages on a percentage of a successful sale. In Ontario, it’s 5 per cent of the sale price. In British Columbia, it’s 7 per cent on the first $100,000 and 2.5 per cent on the rest. The Canadian Real Estate Association has a “pledge of competition” – there are, in theory, no set fees – but in practice set fees are standard. And when home prices surge by 33 per cent in the GTA in 12 months, the static fees charged by agents do nothing but pile on top of an already high cost burden.
There are a lot of other critical issues in Canadian real estate, from low interest rates and the need for affordable housing and more rentals, to the reform of municipal zoning restrictions.
But within the industry itself, this year’s mania has shined a light on long-standing practices that need to be reformed. New rules around bidding and list prices, and more competition on fees, would make for a healthier real estate market.
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