Mike Moffatt: The federal plan to make houses more affordable may backfire

The available evidence shows that banning "blind bidding" drives real-estate prices up, not down.

This toy recently sold for $2.47 million in Toronto after receiving 74 offers.

By: Mike Moffatt

In response to rapidly rising home prices in most of Canada, the federal government has promised to introduce a Home Buyers’ Bill of Rights. This would include legislation eliminating blind bidding in the housing market, which the government claims “prevents bidders from knowing the bids of other prospective buyers, and ultimately drives up home prices.”

This naturally raises the question, “Would banning blind bidding slow home price growth?” Turns out, the answer is probably no. In fact, a ban on blind bidding would likely make prices rise faster, not slower.

That finding should surprise you. It surprised us. However, that is what the peer-reviewed academic literature shows.

At the Smart Prosperity Institute, where I am the senior director of policy, we are dedicated to the “pursuit of a greener, more competitive Canadian economy that works for people and the environment.” Given the importance of housing to both the economy and the environment, particularly greenhouse gas emissions from buildings and transportation between buildings, it is a sector we have studied extensively, from circular economy practices in the construction industry to Ontario’s need for one million net new homes in the next 10 years. Because of our interest in housing, when the Canadian Real Estate Association asked us to examine the academic literature on blind bidding, we accepted the challenge. Our findings are detailed in the report, Banning Blind Bidding.

When the federal government promises that they will ban blind bidding, they are proposing creating a requirement that relevant details of real-estate offers will be shared with other interested parties who are bidding on a home. While “blind bidding” sounds nefarious, we would note that many multi-bidder markets outside of real estate also lack transparency on bids, including government procurement contracts, where bidders are making their offers without any knowledge of what others are bidding. Typically in a multi-bid market like housing, market participants rather than the government determine the level of transparency on bids. Imposing a transparency requirement on Canadian real-estate bid details would be a departure from our norm, but it is not unprecedented. In Sweden, for example, when a bid is made on a home the details of that bid are shared with other potential buyers via text message. 

But would a government transparency requirement affect real-estate prices? When it comes to the impact of bid transparency on the average price of homes, there are three schools of thought. 

The first school of thought, promoted by the federal government, is that a lack of transparency leads to homes selling for higher prices. The reasoning behind this is known as the big gap argument and is straightforward: potential buyers cannot see what other buyers are offering so they may make unnecessarily high offers. For example, if a potential homebuyer knew the two other bidders for a home were offering $800,000 and $805,000, respectively, for a home then they might offer $810,000. But if they can’t observe the other bids, then they might bid something outrageously high, like $950,000, just to be safe, creating a large gap between the highest and second-highest bidder. This not only pushes up the price of that house, but also creates a new baseline value for comparable houses, inflating their value as well.

The second school of thought is exactly the reverse: transparency can actually cause faster house price appreciation in hot markets. That school of thought believes that the big-gap argument is naive. In a transparent system, had the third bidder offered $810,000, one of the two lower bidders would simply increase their bids, creating a bidding war, so the final price may well end up near the $950,000 actually paid in the less transparent system. Adherents note that, while correlation is not causation, markets with more transparent real-estate-pricing systems, such as New Zealand, Sweden and Australia, are also experiencing some of the fastest home-price growth in the world. Finally, they note that in a hot real-estate market, being able to see high or rapidly-escalating bids signals to bidders that a property is particularly valuable, and can create a frenzied market psychology where potential buyers continually try to one-up each other through an escalating series of bids. 

Finally, there is the school of thought that the level of transparency has no impact on average prices. Economists have a concept known as “revenue equivalence,” which states that sale prices in multiple-bidder systems are determined by supply and demand, and that, if a certain set of conditions are met, then the level of transparency should not impact demand (and therefore not impact price).

Before we started this project, I was confident we would find that revenue equivalence would describe real-estate markets. I would have bet on it. I am glad I did not, because as it turned out, I was wrong. We answered the question of transparency’s impact on prices by tracking down every peer-reviewed academic study we could find on the effect of transparency on prices of either real estate or land sales. We found eight that met the criteria, including ones on real-estate sales in New Zealand, Ireland and Australia, as well as vacant land auctions in Singapore and the United States. All eight of the studies had similar methodologies, where they examined markets where properties were sold in the same geographic market during the same period, some in an open-bidding system, and some in systems that lacked bid transparency. The studies examined the average sales prices in the closed and open systems, controlling for as many other factors as possible.

Of the eight studies, six found that higher levels of transparency were associated with higher prices, and two American studies (one examining real-estate sales in the 1980s, and the other investigating 83 condominium sales in New Jersey in 1990) found higher levels of transparency associated with lower prices, supporting the federal government’s argument. One possible explanation for the difference across papers is that the studies finding more transparency leading to higher prices were in hot real-estate markets. It appears that the causal link is that when bids are transparent, when one potential buyer makes a high bid (which is common in a hot market), it sends a signal to the other bidders that a property is particularly valuable, giving them confidence (and arguably overconfidence) to bid even higher amounts. The price difference is not substantial, with each of the six studies finding the premium from open bidding to be less than 10 per cent, but they do find higher prices in more transparent systems.

These studies are important, but they should not be taken as conclusive evidence that banning blind bidding would lead to higher real-estate prices in Canada. The number of studies is limited and there may be something unique to the Canadian market that would cause a blind bidding ban to slow the growth in prices. However, in the absence of any other evidence, it is irresponsible to claim that a blind-bidding ban would lead to slower real-estate price growth. The limited evidence we have supports the opposite conclusion.

As well, even if we accept this evidence, and conclude that blind bidding would increase real-estate prices, that does not necessarily make it bad public policy. There are other reasons why we might wish to have increased transparency in real-estate bidding. Increased perceptions of fairness may be one reason, though, somewhat ironically, this could also cause prices to rise if it encouraged more buyers to enter the real-estate market.

In order to design good public policy, governments should first identify the problems they are trying to solve, then design the policies to address those problems, rather than the other way around. At the Smart Prosperity Institute, we believe that the federal government should be working to ensure that family-friendly, climate-friendly housing is available and attainable, near employment opportunities, for everyone in Canada, regardless of their income level. This would strengthen Canada’s economy, by ensuring firms have access to the workers they need, and workers are not locked out of job opportunities simply because they cannot get to work. This would also lead to improved environmental outcomes, in part by reducing emissions from housing and transportation.

That is our vision; the government may have a different one. If so, they should articulate that vision, then do the hard work of designing evidence-based policy to meet their goals. They may find that a ban on blind bidding would, in fact, push them towards what they are seeking to accomplish. But if the government’s goal is to simply slow price growth, they should be looking elsewhere for solutions.

Mike Moffatt is the senior director of policy at the Smart Prosperity Institute and an assistant professor in the Business, Economics and Public Policy group at Ivey Business School, Western University.

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