The theory of that, and the reality of it are two different things. As someone who has been on both sides of this in Ontario, I can tell you for a fact that blind bidding results in people over paying, and never knowing by how much. The stress of buying a home in the GTA has lead people to stretch their budgets beyond reasonable limits, and realtors have only made it worse now. In recent years it's started to become normal for the list price to purposefully not reflect reality, causing the true sale price of a house to be left up to the buyers, and after probably losing dozens of bids, people get desperate and throw everything they can, which ends up in homes that regularly go over over $100k over asking.

When I sold my house, I had three bids, and the highest bidder payed over $30k higher than the second place. It was still over $100k over asking, with no conditions. That's just the reality of things right now, and it's not the sign of a healthy market for something as critical as housing. People are desperate, and it's getting worse.

This is wrong on a few levels.

1) as someone who has been on the ground as well, I’ve lost a few offers because I was worried about over paying. On multiple occasions, after seeing what it sold for we thought “damn, we woulda paid another $25K on top to get it had we known.”

2) Canadian banks has a very conservative “stress test” for securing mortgages. This includes qualifying at much higher rates then is being offered. Therefore it isn’t possible to “stretch yourself beyond any reasonable limits”

That “damn we would have paid X more” is exactly what it’s designed to encourage - we’re not good at calculating large numbers so once you’ve “made the decision” to pay $500k making a decision to pay $50k more is relatively easy (and seems like nothing).

In a normal Dutch auction style situation you’ll pay $1 more than the second highest bidder, which is a bit more fair.

I think you mean a reverse Dutch action. Which is almost a regular auction.

In a Dutch auction (regular dutch auction. Not reverse.) there is no second bidder. The price starts too high and drops until the first bidder to decide the price is low enough (as it drops) buys.

This part:

  Canadian banks has a very conservative “stress test” for securing mortgages.

... is excellent. More places need it.

Please stop gambling on housing as an asset class.

The middle class doesn't do it in France, Germany, or Japan. In those places, housing prices are kept _fair_ through clear, transparent planning and a blend of free market and regulation. What the hell is wrong with US/UK/AUS/NZ that allows insane leverage to middle class house buyers that drives up the price of houses? It's all silly to me. (I'm less familiar with how much CAN allows middle class people to gamble on housing.)

> Canadian banks has a very conservative “stress test” ... Therefore it isn’t possible to “stretch yourself beyond any reasonable limits”

“stretch yourself beyond any reasonable limits” means that you may not be able to pay your mortgage, it doesn't mean the bank won't offer it to you.

The bank won't offer if you can't pay, at least in the US these days. But we have 30 year fixed mortgages, I think Canada is shorter

In a sense you are both right, you just don't set the threshold at the same place.

The bank will look at how much you earn and how much you owe and say "We can pre-approve you for $X at Y%". They consider that you can pay that rate and they are most likely right.

Now if you do take $X, you have effectively leveraged your entire earnings, which for most people is a pretty bad idea because stuff happens and you can end up with a mortgage you can't pay because turns out you also want a car.

That being said (at least in Canada), your broker won't really let you take the full bank offers, or at least they don't expect you to do it.

In the US, most lenders will do between 36 and 43% of your earnings pre-tax. Assuming you pay another 25 to 30 in taxes, this should be half of your disposable income, leaving 50% or cars food Etc.

For a $5,000 mortgage, that's a $5,000 a month buffer

Um. Look at your numbers again. Assuming your 36-43% is correct (I haven't shopped a mortgage in almost 15 years), that puts the combined total at 61-73%. Also, that combined tax rate feels really low for anyone with the income to effectively bid in this current market. Add up SS and Medicare taxes, federal income taxes, state income taxes, and sales taxes and 30% feels like a floor rather than a ceiling.

EXAMPLE: 120k income breakdown (10k/month):

Federal actual rate 16.5% (24% marginal)

CA State actual rate 6.4% (9.3% marginal)

Medicare rate 1.45%

OSDI rate 6.2 %

CA SDI rate 1.0%

Total:31.55% total before tax deductions and tax shelters

If your mortgage is ~40%, you have ~30% left over.

Per month, this is 4,000 for a mortgage, 3,000 taxes, and 3,000 remainder.

A 4,000/month mortgage covers a 800k loan on $1 million dollar home.

You don't get a lot of house in the bay area for 1 million, So if you are single earning this much, you are looking at condos.

If have two similar earners, you just double everything. E.g. 2 million dollar house with $6,000 per month remaining income.

You are not going to get an 800,000 loan with a repayment of $4,000/mo on a 120K income. For one, that's in jumbo loan territory with more onerous requirements for DTI above and beyond 20% down payment.

You haven't factored in property taxes, home insurance, or anything. Putting these numbers into a calculator, your monthly loan payment is going to be closer to $5,400 a month.

You're taking home $6,800 a month.

You're not living on $1,400 a month in the Bay Area.

No bank is giving you this loan.

The norm in Canada is 30 year term, with a variable rate. It's the second part that can really get you...

30 years hasn't been possible in Canada for several years now (thankfully).

What is normal? It's hard for middle class people to afford normal housing stock in highly advanced countries without 30 years of amortizing debt. Yes, I understand that some countries force you to chain bullet mortgages over ~30 years to achieve a similar effect.

Why is that a good thing?

I think you're conflating mortgage term (which is typically 5 years fixed or variable in Canada) and amortization. The latter can go up to 25 years for CMHC-insured loans at the time.

That makes sense, I would be terrified putting 40% of my pre-tax income towards a mortgage with a variable rate

Seems like you're not talking about over paying, but rather out-bidding someone. It seems like maybe a first offer should establish a baseline price, and everything subsequent should be transparent, or perhaps have a blind expiry on it, so you'd know if your offer was declined before an offer has been accepted

It’s still quite possible to stretch yourself. Variable mortgages are common and interest rates are going up at a rapid clip. It’s possible for them to rise further than the stress test numbers. Refinancing in five years may be painful if you got a mortgage at 1.5%, stress tested for 3.5% and refinanced at 5%.

Stress test currently means you need to qualify at 5-6% if you have 20% down.

If you are putting less than 20% then the stress test is even higher.

I doubt we will see 5-6% interest rates in the next 5 years.

Tell that to the 5.1% rate a friend of mine just got on a new home purchase with >20% downpayment. I dunno if rates are a lot better in Canada or something, but we're already in 5-6% range in the US for some properties. They had excellent credit too.

US mortgages are 30yr fixed. In Canada you cannot get a fixed rate for that long and 5 years is the norm - everyone here effectively has an ARM. This is why rates are almost always higher in the US.

Interest rates are still at 2.5% in Canada. Still a ways off from 5-6%.

Rates are better in Canada. 2.3% is within the norm.

Yep, house on my street was listed for $950k a few weeks ago and sold for almost $1.4m. In my area (Kitchener/Waterloo), every house is selling for $250k-$500k above asking.

Houses are listed artificially below market to expand interest and create bidding wars. No one expected to sell for $950k and if that was the only offer they got it would have been rejected. I had this experience on a property in Toronto where they listed at $1.5 million didn’t get a bidding war, rejected our offer, relisted at $1.71 million and eventually sold.

Above asking is a meaningless number because asking isn’t a reflection of what anyone expects a house to go for. It’s a game price designed to attract as many of the right people as possible to the property.

There was a time in the not too distant past where asking was exactly what a house was expected to go for. When I bought my current home in the early 2000s, most homes went for under asking price by a small bit.

The question is, would an open auction be any better? The process will just happen at smaller increments. And you will have ghost bids to prop up the prices.

I would use a Vickrey auction:

https://en.wikipedia.org/wiki/Vickrey_auction

I think the issues with Vickrey auctions for houses is that a lot of buyers really have no idea what price they are willing to pay for a particular property. The open price auction format gives them a (weird and easily manipulated hint) at what price might be sensible for a particular home.

This is how real time advertisement bidding is done.

I think open auction really would be better. Allow full information on bids and participants can drop out when their absolute limit is reached.

Yes it would be better, because you wouldn't pay your bid (for many it seems to just be max affordable) that was potentially the largest by a long shot.

And I don't see that ghost bids propping it up would be much of a problem, they'd risk winning? You could require registering names, putting a deposit down perhaps, no real need for it to be anonymous even?

This seems intuitive, but it's wrong. As someone who went through the process, I think blind bidding suppresses prices, not inflate them.

When you are making a blind bid, the only information you have is the home itself. The ceiling for your bid is on what you think the house is "worth". You are very conscious about "overpaying" because you have no perspective on what other people are offering.

In open bidding, you are competing against other offers and the ceiling is basically what you can afford to pay.

Can't tell you how many times we lost offers because we didn't want to overpay - when the sold price was revealed we realized we would've paid another $25K on that had we known.

Well I suppose it depends on bidder mentality, sure, but in that case it's still better - you would have seen & bid the extra $25k and got it (maybe).

> In open bidding, you are competing against other offers and the ceiling is basically what you can afford to pay.

Well, what someone else can afford (and is willing) to pay. i.e. you never overpay, pretty much by definition.

(I think there probably exist 'open' auction system where the highest bid (not second) is paid, but the main ones don't work like that, and nobody's suggesting that as far as I've seen.)

Yeah I 100% agree open bidding is better in that it is a more honest and transparent process. I just don't think it will help with prices.

I suspect real estate markets are a lot less efficient than we think.

We take people who know nothing about pricing homes, put them in a high stress time sensitive situation, advised by realtors who are incentivized to close deals quickly and at higher prices, and then expect them to make reasonable bids.

In my opinion real estate assets are likely overpriced and inflexible from what they should be due to the current regulatory situation.

The “money on the table” argument is weak, because the first bid is when people are most rational, it’s only after human psychology takes over that they start bidding higher.

The real estate agents operate as a cartel and wouldn’t accept offers this way.

Farms often are sold in live auction this way with the bidders announcing their bid. Each bidders knows their maximum, but none give that way, all they give away is they are willing to top the previous bid by someone else (even this is a trick - some bidders will pretend to be more/less interested than they really are trying to scare off other bidders)

The auctioneer is typically a licensed real estate agent. The whole farm will be sold that day, sometimes field by field, sometimes as a whole (sometimes both ways - this is complex to understand: they get bids an all fields separately, then for the whole and the larger total wins). Then they sell the equipment and junk. Bankers are on hand to verify financing... For houses most people wouldn't work this way, but for farms it makes sense.

As a farmer in Canada, I haven't seen a farm auction like that since I was a kid. Most farms these days are sold either by someone knocking on a door and making offer that can't be refused or by tender, conducted by law firms. Real estate agents/auctioneers, and the cut they want to take, have largely been taken out of the equation given how easy the farm properties are to sell.

I see ads for farm auctions that work like that every few weeks living in Iowa.

I have no idea why there are regional differences, but I'm not really surprised they exist.

> I have no idea why there are regional differences

I'm sure it is multi-faceted, but supply management is a big difference. Notably, diary farmers in some provinces voted to impose a quota price limit in an attempt to make it affordable for new farmers back in the mid-2000s. This means that the amount that quota sells for is the same now as back then, even though the fair market value has at least doubled in the meantime.

This has created a market aberration where the quota is undervalued and to resolve it farmers have started tacking the difference onto the purchase of land. In other words, on paper I pay you $x for quota and $y for land in order to stay compliant, even though in reality I'm actually paying you $2x for quota and $y-x for the land.

This, of course, has driven up the price of farmland to unreasonable heights as people notice what farmland is selling for on record. $40,000 per acre isn't unheard of these days. I bet you in Iowa, despite having a climate that can easily outgrow us in Canada, won't see anything close to that.

As farmland prices have risen (up ~700% since 2007), residential sprawl out into that farmland has become much more expensive. This has increased the pressure on housing in existing urban areas, pushing prices up there. And, thus, the Canadian housing problem that's being discussed in the larger scope here.

Makes sense.

For those who don't know, the best farmland in Iowa can go for just over $20k, and as you say can grow more value than anything in Canada. Iowa should be the most valuable cropland in the world - great soil, good climate, great national economy, and relatively flat land. (there are places better in some of the above, but they are lacking in at least one significant way and so the value of their land should be less today.)

I don't know how it works in Canada, but in the UK the incentive is that most estate agents take a % of the sale value. They have every reason to push house prices higher. Cartel or no cartel, it is very harmful.

That's exactly how it works in Canada too. Both estate agents split a % of the sale value. That's fine on the seller's side, IMO. But on the buyer's side, it's a silly conflict of interest.

The issue is that the flat percentage incentive is not a valid one, there was a chapter in Freakonomics about that (I seem to remember it was about Chicago estates, but it could have been another city in the US).

The study determined that when a house was the property of the estate agent sold in a little more time at a noticeably higher price.

The idea if that your house sells (today) for (say) 100,000 units of value (pounds/dollars/whatever) the estate agent will get (still say) 5% of it, i.e. 5,000 "units" (also today).

If in a few more months time you can sell it for 120,000, the agent will get (a few months later) 1,000 "units" more, but he/she will have spent a lot more time visiting the property with prospective buyers, runnning ads on newspapers, whatever, so the incentive for the agent is to conclude the sale as soon as possible, even if at a (reasonably) lower price.

The proposal to correct the incentves was to have a flat percentage (like the mentioned 5%) until a certain amount and a much higher percentage (like - if I recall correctly 15% or maybe 20%) on the excess.

Of course it depends on the local current market, but estate agents have interest to push house price higher only until the property is an "easy sale", the sheer moment the house stays on the market for some time (this highly depends on the local market, it could be weeks or months) they will start saying something "Hmmm, maybe we valued a little too much, we (that means you) should discount it by 10%", this in the same 100,000 unit house means that you will get 10,000 unit less, while the agent would get 4,500 units instead of 5,000.

This is how it works in Canada and it's absolutely toxic. I have seen Realtors push people up on price when they're the highest bid.

The Realtors are (transparently disclosed as) working for the seller. Why wouldn't they do that? It's literally their job and everyone knows it.

It's certainly the case that the agent who knows that a particular bidder is the highest/most attractive offer is working for the seller.

The buyer's realtor is supposed to be working in the buyer's best interest and getting the lowest price possible. In reality it doesn't often work that way, especially when the buyer and seller realtors know each other. I just bought a house and both realtors ended up being from the same office, and are good friends. Do I honestly think I got the best price? Not likely.

Maybe it’s different in Canada, but in the US (or at least in Massachusetts and New Hampshire) the agent merely must disclose to whom they owe allegiance. In both of my purchase transactions, the agent I worked most consistently with was legally working for the seller. (I was comfortable with that and acted accordingly, having “my” agent submit bids that I was comfortable with, but not treating/trusting them as if they were my lawyer).

You can have an agent working on behalf of the buyer, but my experience is that’s a minority rather than majority arrangement.

Your experience is not the norm, nor is it one I would recommend in most cases. You should find an agent you trust and can work with well to represent you, and they should be the only agent you ever have to speak to.

Dual representation can work out ok in some scenarios, but the hyper-inflated and super competitive market we're in right now isn't one of them.

Even in a situation where your agent is representing only you, they still have a massive incentive to get you to raise your bid so they get 1/4 of the total commission (and their brokerage house gets 1/4 of it). Their incentive is even stronger than that of the listing agent, because when it comes time to choosing a bid, the listing agent and brokerage is getting their commission one way or another and so a 1% difference in final contract price on a $1M house represents a difference of around $150 pre-tax to the listing agent. A difference of 1% that causes that specific buyer to get the house can represent a $15150 pre-tax difference to the buyer's agent.

If you tell "your" agent that you'd like to bid $1M but are able to and would pay up to $1.2M because you really love the house, you're giving away a lot of information that I decided I wasn't willing to give up and so kept all Realtors at arms-length.

Coming from country(Finland) where the buyer does not employ realtor the whole thing of buyer paying someone to get house feels weird. And seller's realtor really doesn't only care about price, but also about the speed they can sell the property, thus spending less time on it.

The buyer doesn't pay the representative. The seller pays for both agents. Having a buyer represented is generally a good thing even if there are problems. It improves access to the market and helps a person in deciding what houses they can realistically get. A big thing for my wife was that she didn't want to see a house we couldn't afford because of how it would alter her expectations and we couldn't figure out on our own which houses were listing enough below ask that we didn't have a chance at them. Our agent helped us filter houses so that we looked at houses we could end up in.

> Nothing stops the purchasers

Inability to coordinate due to lack of information allows the seller to maintain full control of the process.

It will inflate housing prices

Blind bidding doesnt 'inflate housing prices'. the marketplace competition does. itnis neoyher unethical or the rooy of any problem. its the latest boogeyman in a world that seeks to turn other peoples property into public commodities.