Bidding on a House Will Soon Become a Transparent Process. Or Will It?
The Ontario government recently announced its plans to “end” blind bidding on real estate purchases. These new regulations would allow sellers to disclose the details of bids made on their property and increase transparency regarding competing offers, so long as they choose to do so. With the new policy coming into effect in April 2023, many Ontarians wonder whether these measures will help lower housing costs across the province. However, the answer to this question is not as simple as it may seem.
Blind vs. Transparent Bidding: What’s the Difference?
When buyers purchase real estate, they must put down an offer on the property, also known as a bid. With housing across Ontario in such short supply over the past 2 years, multiple buyers often bid on one home, causing the house to ultimately be sold to the person who places the highest bid. Under our current system, bidders have no idea how many other buyers have bid on the home, nor how much the others have offered. This process is known as blind bidding.
The main problem with blind bidding is that each buyer wants to secure the home for themselves, often resulting in buyers bidding as much as they can afford. The top bid might be $100,000 more than the second-highest bid, artificially inflating the home's property value. When neighbors sell their own homes, they can use this inflated price as a baseline, significantly driving up prices in the area after a few rounds of bidding.
Sometimes, there may be no other bidders at all, but homebuyers desperate to secure a deal may pay $200,000 over the asking price only to discover that they were not competing for the property in the first place.
Currently, transparent bidding can only occur outside the traditional real estate framework, as agents are legally prohibited from disclosing the value of competing bids. The new policies seek to amend the Trust in Real Estate Services Act (TRESA) and remove this requirement.
Under the new policy, every bidder would know the dollar amounts of the competing bids, allowing them to make a more informed decision. Of course, the one caveat with these new regulations is that they allow the seller to decide whether or not they want to use blind or transparent bidding in their process. Critics of the move point out that sellers are not incentivized to help the buyers or to lower prices, and will likely only opt into transparent bidding when it benefits them.
Why Ontario is Removing Blind Bidding
There are many reasons why blind bidding is not an ideal process. Sellers can use the lack of transparency to deceive buyers, artificially inflate prices, and pressure bidders into making rash decisions.
As already-hot real estate markets such as Toronto fail to address their fundamental housing supply problem, buyers are more desperate than ever to secure themselves a home. In order to ensure their success, buyers often offer as much as they can afford to try and beat any potential competing bids. Unfortunately, in some cases the competing offers can be far smaller than the winning bid, if there are any competing offers at all. The lack of transparency that comes with blind bidding leads many homebuyers to feel deceived once the process is completed.
The government initially hoped to remove blind bidding altogether in an effort to reduce property prices. Real estate boards across the country protested this move as a decline in housing prices would likely decrease profits. As a result, the planned regulations will allow sellers to decide whether or not they wish to make the bidding process transparent.
Furthermore, the Ontario government granted the Real Estate Council of Ontario (RECO) power to enforce penalties against realtors and brokers engaging in deceptive practices or behaving unethically. This move was seen by many as a significant conflict of interest since RECO played a prominent role in ensuring the “ban” on blind bidding was actually an opt-in option.
To many, it seems like the primary motivation for the Ontario government in passing these new regulations is to appease voters. Ontarians are becoming increasingly concerned about the housing market’s current state. This shallow policy is a great way for the government to appear sympathetic without enacting any meaningful change.
What the “End” of Blind Bidding Means for Canada’s Housing Market
Under the new system, sellers will have the option to proceed with transparent bidding and allow their potential buyers to see all competing offers. However, this option very rarely benefits the seller. If you keep the bids blind, your buyers will likely offer larger amounts in fear of losing the bidding war. For most sellers, blind bidding works perfectly in their favour.
There are a few likely situations in which the seller is likely to make use of transparent bidding. If all the bids they have received are within a very similar range (less than $5,000 apart, for instance), sharing details about competing bids will likely incentivize buyers to offer more than before.
The main concern remains that the seller will always win in either case. The goal of removing blind bidding was to allow home prices to drop and benefit buyers. However, RECO and other groups interfered in the policy and lobbied to have it amended to an opt-in regulation. Although sellers can choose to do the right thing and provide complete transparency, they are not likely to do so as it is not often going to play in their favour. Sellers will likely only choose transparent bidding when it benefits them, and Ontarian buyers will gain nothing from this policy change.
In all likelihood, blind bidding will continue as the industry standard, and property prices will not be lowered. This new system may even increase prices as it now allows sellers to use transparent bidding to their advantage in situations where they could not do so before.
While transparency may seem like a great system on paper, it is unlikely to address Canada’s unaffordability crisis, and may in fact make it even worse.
In the red-hot Ontario real estate market, policy changes like this one or like the “Ban” on Foreign Buyers do little to help buyers like you. The best way to protect yourself against deceptive selling practices is to enlist the help of professionals. Here at Clover Mortgage, our professional team of brokers can help you create a personalized financial plan to navigate the housing market and understand the true value of properties that may be of interest to you. Contact Clover Mortgage for a free consultation with one of our expert Mortgage Brokers today!
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