It’s arguably the most notable pledge in the Liberal party’s housing platform — and the one that’s attracted the most commentary.
The platform calls for a ban on “blind bidding,” which prevents prospective home-buyers from knowing the bids of others and which, it says, “ultimately drives up home prices.”
It didn’t take long for the Canadian Real Estate Association (CREA), which represents the interests of real estate agents, to say a ban would infringe on the rights of sellers.
“Canadians have the right to choose how they want to transact what is likely the largest purchase of their lives,” CREA said in a release.
“Open bidding is still bidding … Homeownership remains out of reach for millions of Canadians because there is not enough housing supply to meet demand.”
According to the CREA, the average selling price of a home in Canada is $688,000, up 38 per cent compared to the previous year.
With some prospective buyers fed up with blind bidding and housing affordability a top issue in the election so far, CBC News asked a couple of real estate economists to assess the Liberal platform claim.
Going in blind
William Strange, a professor of economic analysis and policy at the University of Toronto’s Rotman School of Management, says one can see how a bidder might be uncomfortable not knowing other bids.
People “find themselves in situations where they possibly bid a lot more than the next highest bidder, and that makes them unhappy,” he said.
Strange says he’s even heard from people who’ve suspected that they were the only bidder in a blind auction — an experience that makes them feel like the practice is dishonest.
So does he think that a ban will lower housing prices?
“Not to a meaningful degree,” he said. “There’s no economic evidence that it would matter.”
He says it shouldn’t be surprising to people that, on average, open auctions and blind auctions tend to result in similar sale prices.
Strange, and other economists who study bidding, point to a broadly accepted idea in the field called “revenue equivalence.” Put simply, it’s the idea that different types of auction do not produce dramatically different sales prices, assuming certain conditions are met.
He says blind bidding is often used outside of real estate, in areas like commercial procurement, and that we wouldn’t see different types of auctions if blind bidding always benefited the seller.
“[Blind bidding] is an incredibly common auction mechanism — it isn’t just real estate agents in Toronto and Vancouver who are doing this,” he said.
The curse of the winner
William Wheaton, a professor at the Massachusetts Institute of Technology’s Center for Real Estate, isn’t a fan of the Liberal proposal either.
“This is dubious,” he said of the policy.
Wheaton says economists tend to look quite favourably on blind bidding — because it means a bid is more likely to reflect exactly how much an item is worth to the bidder.
He cites a phenomenon called “the winner’s curse,” which is when the winner of an auction pays more than they had anticipated or more than the item is worth.
While bidders in both blind and open auctions are at risk of the curse, Wheaton says open bidders may be more susceptible — because knowledge isn’t always power.
“Oh look, somebody is willing to pay this much. Well, I wasn’t willing to pay that much, but maybe they know something that I don’t know — in terms of the quality of the property or something like that — so I’ll go another round,” he said, illustrating how an open auction can get out of hand for a bidder.
Wheaton adds that a particular bidding process being used in a hot market may lead prospective home buyers to fallaciously assume that the type of bidding is what’s causing the outrageous prices, even when other factors are more at fault.
A real estate sign is seen in Vancouver in June 2018. The Canadian Real Estate Association says a ban on blind bidding will not make housing more affordable. (Jonathan Hayward/Canadian Press )
Leo Spalteholz, a realtor who is analyst and owner at househuntvictoria.ca, says he thinks this is the case in Canadian real estate markets.
“Bidding wars are a symptom of an extreme sellers market, they are not the cause,” he said in an email.
Spalteholz also doesn’t think ending blind bidding will do much for real estate prices. He points to Australia’s open auctions and hot housing market as an example.
But he’s still in favour of banning it.
“Ending blind bidding is nevertheless a good idea since it protects buyers from overpaying,” he said.
“With blind bidding, occasionally you see a bid come in tens or even hundreds of thousands over the next highest bid, which is clearly irrational. Ending the practice would protect those unlucky or ill-advised buyers.”
Strange says supply not keeping up with demand is what’s raising prices.
“Housing prices are driven by fundamentals — demand and supply,” he said.
So what’s a prospective home buyer in a hot housing market to do?
No matter the type of bid, both Strange and Wheaton suggest sticking rigorously to what the property is worth to you, and not to get carried away in trying to win.
After all, winning can be a curse.
Fact check: a ban on blind bidding is unlikely to drop housing prices significantly.
Source From CBC News