The Block – Four Bulls In A Bear Pit

25/08/2011 1:18 pm

Channel 9 can now breath a sigh of relief, The Block is over, all houses have been reportedly sold and except for the sisters, all above the set reserves. Pheww!

The drama surrounding the finale of the block is an interesting case study in how the wider economy has been functioning in the past 6 months and provides interesting commentary on two crucial elements of basic economic and accounting theory, the common Keynesian economic theory is derived from the school of “behavoural economics” that attributes emotional and cognitive factors to the decision making processes of investors and something of crucial importance in todays economy, asset valuation.

Anyone watching the finale of the “The Block” would tell you that as the auctioneer attempted to reclaim the reserves for the weary-eyed contestants that the bidding looked woeful. The mixed response to the finale was surely a sign of the times? Gun shy Investors reeked of fear and to be honest, why wouldn’t you? The number and size of the Bears in that auction, just waiting for a mark to raise their hands, ready to pounce, swipe and devour, was enough of a threat to get even the most rugged property investor to second guess their buying tactics and where they chose to set up camp, especially given their choice would be aired for the nation to see.  The finale illustrated on a micro scale what was happening in the broader market. Consumer confidence was palpable…all animal spirits were well and truly at work, as property sales in Melbourne are down 3.9% this year, a trend that is mirrored and exceeded by the previous 6 months share market turmoil. Correlation?

13.58% wiped off the market in the last 6 months confirms what was viewed on “The Block” – that people are paying more attention to the value of an asset, the “Animal Spirits” are once again at work as people respond to fear in the market place. Yes, it should be noted that the Auctioneers/acting as matadors at the front of the hall were able to entice a Bull from the hoards of bears and notch up a victory for one of the couples on the night, whilst picking up a relative bargain in the process. But the question remains, should we, as rational investors, focus more on the actions of those around us and follow the “animal spirits”? or buck the trend and consider the assets underlying value? As 13.58% lost on the market will tell you people have been most definitely concerned with agreeing with the former, however this has obvious and damaging flow on effects.

Fast-forward three days, all properties have been sold and what have we realized? The Bulls of “the Block” should have stood their ground and instead of letting 3 properties be passed in, three Bulls could have had snapped themselves up a bargain. On a broader scale, if investors in all asset classes could draw the bulls from the bear pit and meet the Matadors head on, then confidence would be abounding and there would be fewer finales that ended like this. At least, it would be a lot more exciting.