I work within the real estate and auction industry.  As a part of our business, we sell a respectable amount of real estate at auction.  Real estate sold at auction has the ability to achieve maximum value for the property because there is not a top price in place as in a traditional listing.  This translates to the true market value of a property being determined.  Often the high bid is lower or higher than for what the property would have been listed.

In Shanghai, residential real estate is scare and demand is high.  As a result, the laws of supply and demand dictate the price should be high.  However, the Shanghai Housing and Land Resources Bureau has issued new rules governing real estate sold at auction.  Any land that is sold for at least fifty percent residential use may not be sold at open auction.  Rather, it may only be sold by sealed bid auction.

Bidders will be required to complete their bidding forms on-site, seal their bids and then submit them for notarisation [sic] on-site. Once all the bids have been submitted, they will then be unsealed on the spot.

The land will be sold to the highest bidder at the price offered in its bid, unless the highest bid is lower than the reserve price, in which case there will be no sale. If the two highest bids are the same, those bidders will be able to submit second bids in writing, and the land will be sold at the price offered by the higher bidder in its second submission.

The rationalization behind this method is to slow the escalating prices of residential real estate.

Shanghai has experienced significant increases in land prices recently, which has had a flow-on effect on the affordability of residential housing. The Circular is intended to slow down or reverse this trend, on the assumption that bids submitted via a one-off written bid will not be as high as those that would eventuate in a highly competitive open auction.

This policy will limit the return on investment for owners of residential property in Shanghai.  I presume the intention is to affect the speculators of large tracts of land.  However, the public will be hurt by this policy, as the value of their property will be artificially low.  Potential buyers will submit lower than normal bids in hopes of getting a deal.  Remember, a seller wants to sell as high as possible and a buyer wants to buy as low as possible.  An open auction allows both parties to reach a mutual middle ground based on the principals of supply and demand.

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