Real estate bidding wars may be here to stay
Realtors, the internet and land restrictions can play a part
Frenzy, frustration and disappointment are what home buyers have come to dread about real estate bidding wars. They had better get used to it.
A new study shows that despite some drop-off over the last decade, homes sold through bidding wars have still substantially increased their share of sales over the last two decades. Once a rarity -- representing between three and four per cent -- homes sold through bidding wars tripled their market share during the real estate boom between 1995 and 2005.
The subsequent bust saw some drop-off. But bidding war sales still represent twice as much of market share as they used to. The study is the first to measure and analyze the rise of bidding wars in the North American market and won the 2014 Edwin Mills Award for best paper in Real Estate Economics.
"Bidding wars can create a lot of risks, especially with a heavily indebted population."
- William Strange, a professor of business economics at the Rotman School
"Bidding wars seem to partly be about the boom. But they also seem here to stay," says William Strange, a professor of business economics at Rotman. He co-wrote the paper with his colleague in the business economics department, Lu Han.
The researchers used buyer and seller data from the U.S. as well as buyer surveys in Canada for the study. They found that although an increase in bidding wars was correlated with economic and housing booms, that rise was not consistent from one jurisdiction to another. Washington, D.C. had one of the highest bidding war sales rates, with 29 per cent of all home sales during the boom. In Houston however, that rate was just over 11 per cent, even though the metropolitan area also benefited from the boom.
Greater restrictions on land use -- preventing urban sprawl and therefore limiting housing stock-- a higher use of the internet in the home search process and markets where more buyers make decisions based on emotion instead of economics were all associated with higher rates of bidding war sales. There was also a relationship between bidding war transactions and the use of real estate agents, the study found.
"The single biggest implication is that bidding wars could conceivably be part of a general process of overheating and irrationality in housing markets," said Prof. Strange. "When that's present, it can create a lot of risks, especially with a heavily indebted population."
- William Strange is a professor of business economics who holds the SmartCentres Chair of Real Estate at Rotman. He co-wrote the paper with Lu Han, the Petro-Canada Associate Professor of Business Economics. Read the full news release