The Financial Post
People still willing to jump into real estate bidding wars might want to ask themselves why they want to be part of such a buying frenzy in this softening market.
It always costs you, if you are buying. But apparently some Canadians are still willing to do the bidding of organized real estate and go to war over price.
A new survey from Bank of Montreal finds 72% of buyers are unwilling to get into a bidding war. Among first-time buyers, 37% are willing to go “over budget,” BMO said in a news release Tuesday.
Taken the other way, there are still 28% of people ready to play this shell game and it’s even higher among the novices who might not be expected to know better.
First of all, people need to understand that the whole idea of a so-called asking price is nothing more than an artificial construct. It’s meaningless, many times just a marketing game to draw people into the home.
There was a case two years ago where an agent purposely listed a home for $1 in Toronto to attract interest. That would be a heck of a market crash.
Real estate sellers have the option of listing something for sale at a certain price with zero obligation to sell it at that price. I’d love to see a retailer try that trick.
In the $1 sale, no buyer made an offer for what the seller really wanted and no sale took place — at least based on that marketing trick.
“All that really matters is the actual sale price,” says noted housing bear Dave Madani, an economist with Capital Economics who has called for a 25% reduction in Canadian home prices.
The problem for would-be buyers is an auction process that leaves them blind to what the other guy is bidding.
It’s not a guy with a gavel yelling out “do I hear” this much for the house. It’s an agent telling you you are not the only bidder and you should come in with your “best price” or potentially lose the property.
You could have a home listed for $500,000, you bid $525,000 because there is one other offer and never find out that the other offer was for $480,000.
The multiple offer game creates an inflationary environment that these days the real estate market just might need. The latest statistics from the Canadian Real Estate Association show average prices in Canada up 2.2% from a year ago. March sales were off 15.3% from a year ago and active listings are still climbing in many markets.
Of course, real estate is a very local game. And many of you just want that property on the part of the street that is in the school district you crave.
“In a housing boom, when you’ve got multiple people bidding, the buy side becomes crowded. Prices can lose touch with fundamentals. Bidding wars are part of the housing bubble narrative,” said Mr. Madani.
Laura Parsons, a mortgage expert at Bank of Montreal, said there are number of variables that produce a bidding war and that includes a shortage of listings.
It’s called the winner’s curse“If there is not a lot to choose from, that creates an anxiety in buyers,” said Ms. Parsons. “You can have variables like the time of year, your need to get your kids in school.”
The online survey was conducted among 2,000 Canadians 18 and older between Feb. 25 and March 3 and is considered accurate to within 2.2 percentage points, 19 times out of 20 based on most studies of that size.
“[Buyers] can be very anxious. You know when you see a sale on in the mall at Christmas, everybody wants it and they come and say after ‘why did I buy this’,” says Ms. Parsons.
There is something called game theory in economics which Mr. Madani says causes people to bid on something just for the sake of winning. “It’s called the winner’s curse,” he says.
If you’re part of a bidding war, maybe you need to ask if you’ve put a hex on yourself based on today’s real estate market.
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