In Canada, participation in bidding wars has increased significantly in the last five years. According to RFI Global research, about one in two borrowers who took out their mortgage within this time indicate that they were involved in a bidding war.  

Several market conditions have helped to promote bidding war activities recently. With mortgage interest rates trending downwards, hitting the lowest levels in the history of mortgage rates, different types of buyers have gotten into the market to take advantage of these rates, further fueling the problem of demand and supply due to a limited number of inventories.    

Home-buying Stressors   

Becoming a homeowner is one of the most significant decisions any buyer will ever make. And first-time homebuyers experience added stressors because they must consider different factors as they enter the housing market. They want to understand the mortgage processes, find affordable housing, and, where possible, succeed in getting close to their dream homes.   

RFI Global research shows that in the last five years, increasingly more first-time homebuyers who have taken out their mortgages within this time were involved in bidding wars. More than two in five first-time homebuyers were involved in bidding wars within the last two years.  

Encountering bidding wars before successfully purchasing a home adds another layer of stress to these First-time homebuyers, making them prone to mistakes. More than two in five who participated in bidding wars found the process frustrating and confusing. Part of this frustration comes from their perceived lack of transparency around the bidding process and also that they have to throw their hats in the ring to compete with borrowers with more leverage in the market.   

First-time homebuyers versus Investor-borrowers  

RFI Global research shows that more Investor-borrowers have been involved in bidding wars compared to the first half of 2021 (+6%). Investors tend to be more price-savvy and knowledgeable about the real estate market than first-time home buyers. Investor-borrowers who bid are more satisfied with their bidding experience than first-time homebuyers (65% v. 29%). Participation from these borrowers creates stiffer competition for first-time homebuyers, making it even more challenging to guarantee their success during bidding wars without any consequences.  

The impact of participating in bidding wars on first-time homebuyers  

 RFI Global research highlighted that bidders are increasingly paying more than the original listed price (+12%) compared to the first half of 2021. About one in four first-time homebuyers involved in bidding wars in the last five years indicated that they paid over the listed price. Overpaying has a ripple effect on these buyers. They may not get approved for the amount they need by the lender of their choice due to the home’s inflated value and may take a larger mortgage than they intend.  

 RFI Global research shows that the proportion of first-time homebuyers who participated in bidding wars and have moved on to refinance is disproportionate to those who did not participate in bidding wars. This indicates that first-time homebuyers involved in bidding wars are forced into early refinancing, likely due to unsustainable borrowing conditions and repayment obligations.   

At the point of the bid, they want to put forward their best offer in the face of tough competition. However, the painful trade-off of this best offer is what they truly can afford long term.  

Bidding wars are here to stay, for now  

Finally, the past two years have been unprecedented for the real estate market with low-interest rates, high property demand, a relatively low supply and moving sprees accelerated by the pandemic. While some of these market conditions have started to change, bidding wars may not be going anywhere anytime soon.   

Borrowers, especially first-time homebuyers, need to consider the long-term impact of their participation in bidding war activities. The existing banking relationship and good advice are two of the top five drivers of choice for lenders for first-time homebuyers; lenders can look to provide guidance and support to these new entrants into the housing market where possible. These types of support will, in turn, help to deepen existing customer relationships. 

To learn more about RFI Global’s Canada Mortgage Council, reach out to marketing@rfi.global