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Will the blind bidding ban work?

“The issue of chronic undersupply is having a devastating impact for both prospective buyers, and those who are renting in major Canadian cities.”

One of the core components of Ottawa’s 2022 budget was a focus on housing. While it’s appreciated that the government is now taking a serious look at housing affordability, much of its plan will do very little to dampen the chaos, like its ban on blind bidding, primarily because it fails to properly address the issue of chronic under-supply.

The supply of homes in Canada, per capita, is the worst in the G7, and it has actually gotten worse over the past eight years. In 2016, Canada had 427 housing units per 1000 people. In 2020, that number actually decreased to 426 units per 1000 people, and in 2022 it fell to 424 units per 1000 people. France by comparison leads the G7 at 540 units per 1,000.

The issue of chronic under-supply is having a devastating impact for both prospective buyers, and those who are renting in major Canadian cities.

In Toronto, for example, the average home price is now more than $1.3 million dollars. A family needs an annual income of $180,000 to purchase the median Toronto home, and $130,000 to purchase the median condo, all while the median income for a couple in Torontois only $97,640. As the crisis worsens, buying an average home is becoming virtually unattainable for the average family.

Unfortunately, the issue of chronic under-supply is also being passed onto renters as well. The average rent for a two-bedroom apartment in Toronto is $2,715, which, based on the CMHC’s affordability metric, requires an annual income of $118,000.

So, housing prices are inflating at rapid levels, while wage growth is lagging far behind, and the response from Ottawa could largely be described as “tinkering with demand.”

Take the federal government’s ban on blind bidding, which is the process where prospective buyers submit their bids on a house without knowing the amount of the other bids. The thought process here is that blind bidding is causing bidding wars that are artificially inflating prices upwards. But is that true?

Not according to housing economists. William Strange, a professor of economic analysis at the University of Toronto, explains a ban on blind bidding wouldn’t reduce pricing. 

“Not to a meaningful degree. There’s no economic evidence that it would matter.” 

Economic analysis comparing bidding models, such as blind bidding versus open auctions, finds different types of auction do not produce dramatically different sales prices.

In addition to Professor Strange, Professor William Wheaton, at the Massachusetts Institute of Technology’s Center for Real Estate, called the ban on blind bidding “dubious” because bidding wars are a symptom of an extreme sellers’ market, and not the cause. And the reason why Canada’s real estate market is such a sellers market is because virtually every city has an under-supply of housing.

Beyond the policy being ineffective, it completely ignores the issue of under-supply and raises questions about competition between auction types. So long as there is nothing mandating all home purchases be done in a blind auction, the market should remain open to competing auction types. Sellers may choose to sell their home in a blind auction, but if buyers demand otherwise, we could see some shift and competition between the two auction types. That would be a preferred outcome, in comparison to picking one auction type over the other, because it ultimately leaves that decision between buyers and sellers.

And while some might read competition between auction types of free market zeal, we are seeing changes from the industry itself. For example, the Canadian Real Estate Association already announced it’s piloting a real time tracking system for bids, streamlining the buying process and increasing transparency for consumers.

So will a blind bidding ban do anything to alleviate the housing crisis? No, not really. At best, it tinkers at the margins of demand, while leaving the housing shortage problem unaddressed.

Originally published here

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