There has been a great deal of talk in the media lately about rising household debt being fueled by runaway housing markets in Toronto and Vancouver. Total Canadian household debt stood at $1.933 trillion at the end of the first quarter. Most of that — $1.268 trillion — came in the form of mortgage debt.
Our finance minister, Bill Morneau, indicated that the government is watching the housing market closely and is ready to take a "deep dive" into what is causing imbalances.
The Financial Post reported the government is looking at the impact of demographic changes in cities, different labour markets, supply issues and foreign investment. Experts are tossing around all kinds of ideas to cool the housing market: increasing the down payment required, shortening amortization periods, taxing foreign investors etc.
All this may sound hopeful but the runaway real estate markets are the ones in Toronto and Vancouver and, except for foreign investment, none of these factors address the underlying problem in these two cities.
Millions and millions of dollars and a great deal of time will be spent on conducting studies and guess what, they won't solve anything because the root cause of runaway house prices in Toronto is being completely ignored. If only the top honchos asked us - the people on the ground!
So here is my take on what could cool the housing market in Toronto significantly and do more to reduce household debt than any other one thing; cut off the blood supply to runaway house prices by ELIMINATING BLIND BIDDING for real estate.
What is blind bidding? Blind bidding is a system of buying a house in Ontario when there are multiple bidders on one house yet none of the participants know what the other is bidding. Let's say that we are marketing a house for $899,000 and we procure one offer from one buyer for this house. In this scenario, this property will probably sell for its asking price of $899,000 as long as the seller signs on the dotted line.
But in a different scenario, let's say, we procure three offers. One offer may come in at $940,000, one may come in at $1,000,000 and one at $1,040,000. Do you see where I am going with this? Because buyers had to guess what their competitors were offering, this house sold for much more than it probably would have had the process been transparent and everyone knew what all the tabled bids were. No sold data may support this sold price yet it becomes the new benchmark. Multiply this disparity amount by thousands of transactions per year since 1996 and one can only imagine how much this has contributed to the ballooning mortgage debt.
It's obvious, from my standpoint, that the current $1.268 trillion in mortgage debt would be substantially lower if we eliminated blind bidding for real estate.
The process of buying real estate in Ontario is the complete opposite of transparent. Many progressive countries in the world use a more transparent system such as open auctions. But in Ontario, where the government regulates the real estate industry, there has never been an in depth study on the effect blind bidding has on the market and the risk this system poses to the economy.
Who benefits from blind bidding anyway? You may say that the seller does, but the seller may also have a house to buy and will be on the other side participating in a blind bid as well. In addition, banks have become much more conservative with their lending practices and sometimes do not appraise a property at what the buyer has paid, putting more households at financial risk.
There isn't a single home buyer who will tell you they like this blind bidding system or that it is fair. Blind bidding is bad. Period. There is nothing positive about a blind bidding process and furthermore, it brings out the worst in people.
Sitting at an offer table with sellers, some not all, will manipulate the system. The listing agent's job is to procure the highest price for the seller. But, this system comes with many procedural problems because it propagates greed. It was greed that brought the US financial system down in 2008 and it is greed that is contributing to runaway house prices in Toronto and Vancouver.
So for example, when we have three offers, let's say, even if there is one offer that is many tens of thousands of dollars higher than the next, some sellers want to go for endless rounds of bidding to squeeze more and more money from the buyer. During a highly charged emotional process, the buyer gets caught up in the game and risks qualifying financially to purchase the house. What does this system do to household debt?
Furthermore, blind bidding is bad because it has inherent loopholes that give the unethical listing agent a great deal of power that can be used to manipulate the system. Although against the rules, a listing agent has the power to influence who buys the house by secretly revealing the highest bid to their preferred buyer or preferred agent tipping them on what to pay.
Can you see how vulnerable this system of buying real estate is? What other industry allows this kind of vulnerability? Yet the real estate industry has sanctioned a process that is unfair and has placed our economy at risk by contributing to skyrocketing levels of household debt.
It's time the government took off its blindfold and spent money looking at how to improve the process of buying real estate in Ontario to solve runaway house prices instead of looking in all the wrong places.