Pulse Check on Bidding Wars: On the Way Out or Heating Back Up?
Simply hovering around the real estate market in Canada in 2021 could cause third-degree burns. The conditions have been unpredictably volatile, with record-setting months for gains and losses alike. Homes have been selling for $50-, $100-, $500,000 over asking price.
But what’s happened since then? On June 1st, a new stress test was implemented that vets borrowers at a full 5.2% higher than the offered rate. There have been talks of a housing bubble, of the market cooling, and waning consumer confidence. The Liberals called another election, and many parties vowed to end blind bidding and provide more housing options for the limited inventory.
There were indications that bidding wars might be on the way out in June, and after new governmental reform and shifting market conditions, did bidding wars fizzle out or find new life?
The effects of supply and demand
In March 2020, the pandemic created a supernova level of demand for real estate as Canadians searched for homes better suited for shifting needs. Many jobs in urban centers ditched the office, providing freedom for employees to live in the location that suits their needs and budget best. These factors combined with record low interest rates created a flurry of eager home buyers.
In comes the new stress test and many homeowners got cold feet and hesitated to list. Fear increased in sellers because they could not predict future market downturns. They hoped that waiting would avoid some of the worse conditions the pandemic has to offer. Thus, inventory levels in many major markets dropped to historic lows. Pre-stress test, inventory levels were already hampered, and even by September 2021, much of Canada was still experiencing a shortage in supply.
While the supply tightened, buyer demand began to plateau. Quite simply, this equation meant there were many buyers competing for a limited number of homes. Something that is still occurring today in the Canadian market.
The Liberals wage war on the blind bidding competition
In almost every other type of competition, players can use other players as a gauge to know what it will take to win. In the uber-popular Netflix series Squid Game 1 for example (mild spoiler alert), the games they play are based off popular children’s school yard activities. The rules are clear, the stakes are real. You can watch the player in front of you and use this information to your advantage.
This is not the case for Canada’s real estate bidding process. Here’s how the blind bidding process currently works: if you submit an offer to purchase a home, you are allowed to know if there are other offers and how many have been tendered. But there is no transparency about how much other competitors are offering. This results in submitting a “blind” bid, simply crossing your fingers that its high enough to win. It’s common practice in hot markets for sellers to set an “all offers date.” This requires all offers to be submitted by a specific date and helps generate excitement.
According to Murtaza Haider a professor at Ryerson University and Research director at the Urban Analytics Institute, “the blind bidding process artificially inflates the price of housing,” 2 which inevitably forces buyers to spend more for their properties then they would have otherwise.
In August 2021, the Liberals vowed to end the practice. 3 In fact, the party promised to amend the country’s Criminal code to “prohibit the practice and force the asking bids for real estate to be made public.”
However, it’s important to note that this policy is far from guaranteed. Most real estate laws fall under provincial jurisdiction, so it’s not clear if the federal government can ban the practice outright.
National outlook versus Toronto
Limited supply in many parts of the country since June have created tight conditions. With seller’s market conditions prevalent, prices have risen but the number of sales has suffered. However, in September 2021, home sales in the Canadian real estate market rose by 0.9% month over month. This is the first month-over-month increase recorded on the MLS system since March 2021. 4
September saw one of Canada’s hottest markets, Toronto, witness the sales-to-new listings ratio shift below 60%, indicating a move back towards more balanced conditions. Sales only dropped 4% year over year in September and increased 13% month over month. Toronto was the only region in our report that moved out of a seller’s market, and it was encouraging for buyers that one of the driving forces of the Canadian real estate market is shifting closer to their necessities.
However, in October, Toronto shifted back to the hands of the sellers. 5 This is a signal of the volatility of the market. No matter the trends, some local markets continue to watch prices shoot up each month as achingly low supply is squeezed by relentless buyer demand. However, through the chaos, regions like Toronto may be a weathervane for the rest of the country.
Is the tap on bidding wars shutting off?
For example, between March and April 2021, it was as if a tap was turned off on bidding wars. Buyers started to trust that each new listing won’t be the last listing they’d be interested in, and suddenly those massive overbids dried up. Are we starting to see similar stops to bidding wars that we experienced earlier in the year?
Shifting consumer confidence
The real concern for consumers is that a home they purchased could be worth far less soon. This is on top of the fact that they may have paid hundreds of thousands of dollars over asking price. Buyer’s remorse runs strong in those with the intention of selling quickly, as their property might not fetch their initial investment if prices fall.
Timing is everything. In March, multiple offers, bidding wars, and homes sold over asking were a dime-a-dozen. Sellers dominated. But it only took a short time for the market to cool with limited inventory afoot. Now, there are talks of a housing bubble, we’ve seen a new stress test and promised government reform to curb the prominence of bidding wars.
Everything is pointing to more balanced conditions on the horizon after almost a year of watching home prices climb in amazement. The bidding war frenzy that was the overheated 2021 spring market might continue to wane.
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