Low supply and high demand have given sellers the edge in the Canadian real estate market, and blind bidding has become much more common over the last year, artificially inflating housing values nationwide, and leaving many families sitting on the sidelines.
What is it exactly?
Blind bidding is the process of submitting a bid without knowing what the other homebuyers are offering. For example, if there are three people interested in purchasing a home, one person could bid at the asking price, the other individual could bid $10,000 above the asking price, and the third bidder could submit $30,000 more than the asking price. Without knowing about the other bids, the third person paid far more than he or she needed to.
This additional layer of an overheated and potentially unsustainable housing boom is causing frustration for new entrants in the Canadian real estate market. Some are calling it unethical behaviour that compounds the problem of housing affordability. What may have previously been a tactic concentrated in the competitive markets of major urban centres, blind bidding has seeped into small towns and rural communities across the country.
With so much controversy surrounding the modern practice, what do industry professionals say? What’s more, will government intervention be required to protect novice homebuyers in this market?
The Blind Bidding Debate in Canadian Real Estate
According to the Canadian Real Estate Association (CREA), the average house price nationwide is more than $700,000, with British Columbia and Ontario averaging $915,000 and $862,000, respectively. Because demand is fierce, supply is limited, and interest rates are extremely low, valuations have skyrocketed over the last 15 months.
Before the COVID-19 public health crisis, bidding wars, bully offers, and even blind bidding were situated in Toronto and Vancouver markets. However, fast forward to the present; these techniques are now being widely used in the Atlantic Canada real estate markets, and even in the Prairies. And this is igniting fierce debate throughout the real estate industry.
Douglas Porter, the chief economist at the Bank of Montreal, asserts that it is necessary “to have an auction process that should be transparent and open to all bidders.”
Many real estate agents are ignoring the restriction whereby buyers are not permitted to know the details of other competing offers. Instead, they are choosing to inform buyers what they will need to secure a property. For example, if prospects are visiting a home for sale that is going for $910,000, some realtors inform them that six bids are topping $1 million.
Others have become concerned that this strategy has become the dominant method of buying homes in Canada’s most populous housing markets. As a result, some are pushing for changes to system through tighter regulations, reaching out to the Real Estate Council Of Ontario (RECO), Office of the Superintendent of Financial Institutions (OSFI), and even the Ministry of Finance.
But could dismantling blind bidding be enough to cool down the Ontario real estate market and the rest of the housing sector across the Great White North? Experts contend that cheap lending rates and more demand than supply is truly what is fuelling the current housing frenzy. At the same time, advocates of any means necessary to achieve a slowdown in the growth of home prices assert that any little bit helps to make these tight markets more accessible for buyers.
Negative Equity in Shark Infested Waters?
Given the state of the Canadian real estate market, are these blind bidding tactics necessary? There is enormous demand for a three-bedroom home in downtown Toronto or a townhouse in Halifax. With the housing sector is as hot as it is, homeowners will attempt to squeeze every last drop, knowing that they’ll need the equity for the purchase of their new home in this highly priced market.
That said, there are signs that the spike in prices has peaked, whether it is in Ontario’s cottage country or Atlantic Canada. Therefore, if people are diving into the real estate market now and pay way over the asking price, it is more than likely that they will not experience the same level of growth. As a result, many new homeowners will be stuck with negative equity on their properties for many years to come.
Robert Kavcic, a senior economist at BMO, wrote in a research note that recent homebuyers better love the home they purchase.
“Even if we build in some permanence because of things like work-from-home and scarcity of waterfront, it’s still not hard to see a scenario where froth comes out and the last buyers in (especially in a blind-bid scenario) are faced with years of negative equity,” he stated.
Our advice? If, as a home buyer you’re confronted with a blind bidding scenario, approach with caution! Be sure that you have done your due diligence by working closely with a trusted and experienced REALTOR® who understands the present and future value of your home and can help you crunch the numbers with confidence.
Original Post Credit: RE/MAX Canada Website Blog