Ireland’s Bidding System Fuels Housing Prices and Panic Buying

A recent report from the Economic and Social Research Institute (ESRI) highlights how Ireland’s property bidding system contributes to inflated housing prices and panic buying among potential buyers. The study delves into the psychological dynamics of the house-buying process in Ireland, revealing significant differences compared to other countries, particularly in how bids are made and handled.

Ireland operates under an open offer framework for property transactions. In this system, sellers establish an asking price, and buyers submit bids through estate agents. Sellers are permitted to evaluate multiple bids and negotiate until a highest bidder is determined. Importantly, prospective buyers often receive notifications if another party has placed a higher bid, which can drive them to increase their offers, resembling auction-like conditions.

The lack of commitment in this system is also notable. Neither buyers nor sellers are bound until contracts are formally signed, allowing for last-minute changes. This flexibility may seem advantageous but can lead to chaotic bidding wars and last-minute withdrawals, complicating the overall process.

In contrast, the sealed offer system used in Scotland presents a different approach. In this model, bids are submitted confidentially through solicitors, with no knowledge of competing offers. This mechanism introduces more security and encourages commitment, as withdrawing from an accepted offer requires significant effort and can incur additional costs.

The ESRI’s analysis emphasizes the psychological implications of the open offer system, particularly the phenomenon of loss aversion. Buyers may feel pressured to exceed their initial budgets when faced with the risk of losing a property to a competitor. This pressure often manifests in the form of panic buying and inflated offers, creating a market that favors sellers at the expense of buyers.

A significant concern highlighted in the study is the practice of gazumping, where sellers accept higher offers from other buyers before contracts are signed. This experience can lead buyers to stretch their financial limits, either by increasing their bids on the gazumped property or by making larger offers on other properties to avoid similar situations.

The report also addresses the potential for ghost bids, where fictitious offers may be reported by estate agents to artificially inflate prices. While legislation exists to counter this practice, the extent of its occurrence remains difficult to quantify.

The study indicates that under the open offer system, buyers are often compelled to spend more than they initially planned due to the fear of missing out, commonly referred to as FOMO. This sense of urgency is exacerbated by the transparency of other bids, pushing buyers to make decisions based on perceived competition rather than independent valuation.

The ESRI asserts that transitioning to a sealed bidding process could alleviate some of these pressures. By ensuring that buyers remain unaware of competing offers, the sealed system would reduce the psychological incentives to overbid, allowing individuals to offer what they genuinely believe a property is worth instead.

Despite the potential benefits identified by the ESRI, it remains uncertain how much traction the proposal for a sealed system will gain. The current open offer framework, while criticized, is familiar to the Irish public and entrenched in the country’s property culture. Changing such deeply rooted practices will likely require significant consideration and dialogue among stakeholders.

As Ireland grapples with rising property prices and intense competition among buyers, understanding the implications of its bidding system may be crucial for informing future reforms. The ESRI’s findings serve as a valuable resource for policymakers and industry stakeholders aiming to create a more equitable housing market in the country.