Bidder Beware: Demand Shocks and Overbidding in Residential Housing Markets

Bidding wars, whereby multiple buyers compete for a property and place bids in excess of the initial list price, have become increasingly common in residential real estate markets. However, there is only scarce empirical evidence on their causes and even less evidence on their direct and indirect effects. We link bidding behavior to shocks to local demand by leveraging quasi-experimental variation from a generous tax exemption policy in the Dutch housing market. In those local markets most affected by the policy, the share of transactions above list price increased significantly, compared to less exposed markets. Importantly, this impact of the tax exemption on transaction outcomes is not driven by treated buyers alone but spills over to other buyers, who also increase their bids. Both effects last well beyond the period in which the tax exemption policy exists. The policy also has important wealth effects that outweigh the original tax exemption. Finally, we show that the demand shock does not have a uniform effect, as it is most pronounced in markets that were relatively tight to begin with.