Analysis: Reforming the bidding process could potentially achieve some much needed stability for prospective home owners
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You've finally got mortgage approval. You’ve done your research and you quickly understand what it means for the seller to be in a chain. Maybe you’ve devised a strategy like a poker player: go in 5% under asking, only bid in €1-2k increments etc.
You find a home that fits the bill and put down your very first bid, only to be outbid by someone who adds €90k to the 'asking price’ in one single bid. You quickly find yourself continuously in similar bidding wars with anonymous house-hunters on this house - and the next one. You wonder, can this be real? And then it happens again. And again. And again.
This frustration is part and parcel of trying to buy a home in Ireland. In November 2023, then Taoiseach Leo Varadkar said an expert group would be put together to examine the process around bidding to help combat the ‘stress’ of it. "The expert group will examine the evidence, they will hear people's stories".
He highlighted the Scottish model as a possible alternative. In the Scottish model, the buyer puts in in a sealed or closed bid once, and the highest bidder gets the house. "I am not saying it is the best thing to do, it might not be, but at least it gets away from that stress a lot of people experience several times. By the time they actually get to buy a house, they were outbid a few times and it drags on for weeks."
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From RTÉ Radio 1's Drivetime, Dr Rory Hearne from Maynooth University and estate agent Clare Connolly discuss the return of Celtic Tiger-style bidding wars
Varadkar added that you hear some "horrific stories" about what people have to go through, "whether it's gazumping, whether it's issues around probate, people putting houses on the market that aren't actually available for sale, all sorts of issues around the snag lists, people having to get two different surveyors to look at the same thing. There's a lot of bureaucracy and I'm sure we can improve the process around buying and selling a home so that it's fairer on people".
Reforming the bidding process could potentially achieve some much needed stability for prospective home owners. The Irish housing market is notoriously volatile: figures show Irish house prices rose 431% between 1995 and 2007, before crashing by a whopping 49%, and then recovering by 53% again between 2013 and 2017. By the end of 2023, house prices in Ireland exceeded those at the peak of the Celtic Tiger boom in 2007.
"We know internationally that we have particularly volatile house prices and the conjecture is, that part of the reason for that might be because of the way we undertake the transactions," says Pete Lunn, founder and head of the Economic and Social Research Institute's Behavioural Research Unit and Adjunct Professor in the Department of Economics at TCD. Lunn cautions that the research on this isn't complete yet and is at the start of the process, not the end.
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From RTÉ Archives, Margaret Ward reports on the rising cost of home ownership in Ireland in 1998
Lunn says that in Ireland we use an "open office" system, while other countries have different systems. He also points to the Scottish system as a possible alternative. He adds that "our system is not legally binding at the point that offers are made and accepted. The question is whether these things actually cause greater price volatility," he says.
When buying a house in Ireland bidding is usually done via an online system or via email with the estate agent. If the bidding takes place online, the bidder can typically see all the approved bids from other prospective buyers, which gives a degree of transparency. If bidding takes place over email, it's the agent that manages the process. In both cases prospective buyers typically have to submit their mortgage proof of funds/approval in principal, as well as inform the agent of their status as buyers (for example, whether they are first-time buyers). Even when a property goes sale agreed, this is not legally binding. There's still a chance that the buyer can back out or the seller may back out if they're given a higher offer (this is known as gazumping).
As a behavioural economist, Lunn says there are reasons to suspect that these things do add to the volatility of our housing market. "We know from research that's been done in behavioural economics, that when you put people into auction settings, where they're in a competitive situation and they're bidding against other people, if they get out-bid they feel like they've lost something even though they might not have acquired it yet. What that's likely to do, is make people stretch themselves further than they would otherwise have done. If they set themselves ceilings they're quite likely to push through those ceilings.
"So the question we're asking, is whether it would be better to reform that system so that people are being less pushed to keep trying to stretch themselves. It’s very possible that there are other systems that we could use, that would be better from that point of view and they would reduce house price probability, as well as reducing how much people tend to stretch themselves when they get into competitive bidding situations".
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From RTÉ Brainstorm, how much does it really cost to build a new house in Ireland?
He believes the amount of bids that are or aren't legitimate or serious, as it were, are also an issue here. "That brings in that second question of, you know, at what stage should offers be legally binding? At what stage should people definitely have to show that they can afford them? Because the danger is what you're essentially doing is putting lots of bids in the system that were never actually gonna happen."
"And that does two things; it pushes more people to bid higher, but it also means that it's not good for sellers either, because it means sales are more likely to fall through."
Lunn says two things are key in the conversation around house prices and bidding in Ireland. "It is factually the case that our house price volatility is large internationally. In comparison with other common law countries, we probably have the largest volatility of anybody in the last five decades or so. But the other thing that is definitely important, is there are other systems in other countries that do appear to work potentially better. At least exploring those systems and thinking about how we could change it is really worthwhile, it seems to me."
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The views expressed here are those of the author and do not represent or reflect the views of RTÉ
