The big property lessons from The Block auction results

Despite the completely over-the-top hysteria over ‘plunging prices’, the vast majority of property owners are still sitting on huge, tax-free, capital gains.

Wow. Australians got to watch the collapsing property market in real time on their TVs Sunday night with the Nine Network’s ‘The Block’.

Or did they?

Yes, three of the five properties got passed in – one of them sold later - and the fourth dribbled just $20k over its $4m-plus reserve.

Indeed, all five would likely not have sold but for the eccentric multi-millionaire Danny Wallis, who has been a mainstay of the show’s auctions in recent years and bought all three that did sell.

So, is that the property market in, admittedly, rather weird, microcosm - in and around Melbourne – as we head deep into what used to be the peak spring season?

I suggest the answer is a bit of both ‘yes’ and ‘no’ – starting with Wallis. His presence, and his idiosyncratic bidding, tells you these were not the sort of auctions everyone else goes to Saturdays.

And so gee, if he hadn’t been there, it would have been a real bloodbath?

True, but that, to me, more reaffirms some of the oldest lessons in real estate, that have sort of been lost in the last couple of years of ‘free money’ and the also low interest rates that drove the boom through the 2010s.

The most direct one was overcapitalisation, feeding into the oldest rule of property: position, position, position.

The building and lavish fitout of these properties might have made for good TV; and then again, for many, they might not have.

But it led to massive over-investment in the properties, and grossly way-over-the-top expectations of what they would sell for, over their land value which would have been around $2m each.

Danny Wallis with The Block host Scott Cam. Picture: The Block

To me, that there was buying interest for up to $2m for the actual houses, over and above the land value, was actually rather positive.

No, in the post-free money reality, people weren’t going to pay $3m-plus for the actual constructions – apart that is from Danny.

That clearly points to the wider reality across the property market, both by location and by property type – with a big largely unappreciated driver through 2023 the return of immigration-driven population growth operating most immediately through the rental market.

The completely over-the-top hysteria over ‘plunging property prices’ – especially in supposedly upmarket journals from supposedly informed commentators – has utterly missed the fundamental point.

This is, simply, that the vast – and I mean overwhelmingly vast – number of property owners, especially in Melbourne and Sydney, are still sitting on huge, tax-free, capital gains.

Only first home-buyers, and only first home buyers of the last couple of years, are feeling any real pain; and as one great investor once noted: you only actually lose money if and when you sell.

Over 90 per cent of those buying a property through this spring and indeed through all next year will be doing so after realising a massive – and to stress again, tax-free – capital gain, or sitting on that gain and buying a second property cheaper than would have otherwise been the case.

That reality is actually a telling pointer for interest rates; underscoring what Westpac CEO Peter King had to say Monday: in essence, that interest rates are going to have to go higher and stay higher for longer than most anticipate.

I would add, that one party in particular does not yet anticipate, just as it did not anticipate rates going up at all in 2022: the Reserve Bank.

The RBA’s latest forecasts last Friday were a bizarre – and disturbing – combination of Goldilocks (not too-hot and not too-cold) and (best of all possible worlds) Candide.

That inflation would miraculously cure itself through 2023 and rates would not have to go much higher and would start coming down by the end of the next year.

Hmm.

Originally published as The big property lessons from The Block auction results