Open Bidding: Will New Rules Cool Toronto’s Housing Market?

GTA house-hunters, buyers and sellers alike are abuzz over Ontario’s impending open-bidding rules, and for good reason.

For one thing, knowing the value of competing offers on a home creates more transparency around what is often the most important purchase during a person’s life. We at Strata.ca support open bidding for that reason alone. By introducing a national plan to end ‘blind bidding’, the federal government appears to be taking a similar view on an issue that was described in the 2022 Budget as making home-buying “even more stressful for too many Canadians.”

For another, the Ontario’s government’s controversial decision to give sellers the option of disclosing the details of competing bids is being widely lambasted for its disingenuity. Why, critics howl, would a seller choose to go with open bids anyway when the so-called ‘blind-bidding’ process in place today will inevitably inflate the final sale price? As it stands, provincial law states that real estate brokerages representing sellers must disclose the number of written bids, but not the amounts of those bids.

I get it: Residential real estate prices in the GTA just keep climbing. Even condo units, which are typically more affordable than houses, are in high demand — with the average sold price currently at about $784,000, up 15 percent from a year earlier.

But don't kid yourself and think that open bidding alone will prevent prices from rising, especially in a market that's desperately in need of more inventory. Rising interest rates will cool a hot real estate market — open bidding won’t.

The flawed assumptions about open bidding

In countries where open bidding is the norm, such as Australia, the sales process is often driven by ego and a strong desire to win. So people naturally end up paying well above market value.

Let's say someone bids up by $100,000 in one shot — it's such a show of strength that it knocks everyone else out. The bold bidder has flexed their muscles, scaring off all competitors. People who don’t have to deal with an open or auction-style system assume that the process simply inches up until an acceptable price is reached. But that’s not the case. Often, someone delivers a knockout punch that dramatically increases the price.

More evidence from around the world

But don’t take my word for it. According to a 2021 report by the Ottawa-based Smart Prosperity Institute, Sweden does not permit blind bidding. Yet that country has experienced even faster home price growth during the pandemic than Canada, and comparable home price growth over the last 20 years. New Zealand, where open auctions for homes are common, has experienced the fastest-growing home prices in the world over the last two decades.

The report concludes: “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.”

Spare a thought for first-time buyers

Open bids can be especially frustrating for first-time homebuyers who lack the resources to compete with deep-pocketed bold bidders. What less wealthy house-hunters need is more supply, as evidenced by the fact that the GTA’s new and total inventories of condos are both down substantially over the past year. Low Supply + High Demand = Price Increases. This is as basic as economics gets.

Again, the Smart Prosperity Institute backs me up here: “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.”