Research Says Bidding Wars Are Here to Stay

Real estate bidding wars are here to stay, according to research conducted by professors at the University of Toronto. Bidding wars, which were once a rarity peaked during the housing bubble. Although bidding war numbers have dropped, they still happen in a significant amount of home sales.

In the 1980s, only 3 to 4 percent of homes were sold in bidding wars. From 1995 to 2005 that number skyrocketed, with Washington D.C., having on the highest rates at nearly 30 percent of homes sold involved in bidding wars. However, according to the study although an increase in bidding wars was correlated with economic and housing booms, that rise was not consistent from one jurisdiction to another. In the Houston, the rate was only 11 percent, even though the city benefited from the housing boom.

"Bidding wars seem to partly be about the boom. But they also seem here to stay," said William Strange, a professor of business economics who holds the SmartCentres Chair of Real Estate at the Rotman School, who co-wrote the paper with Lu Han, the Petro-Canada Associate Professor of Business Economics, in the report.

This research implies bidding wars are not just a lingering effect of the housing bubble, but instead a possible new strategy used to sell homes.

"The persistence of this suggests that people have decided that this is a good way to think about selling these kinds of goods," Strange said to the Washington Post, "selling housing in a more auction-like way."

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," Strange said. "When that's present, it can create a lot of risks, especially with a heavily indebted population."