Why ‘The Block’ delivered a shock

To all of Australia, last night was a massive shock. It was the first time in a very long time there was a harsh realisation that vendors don’t necessarily make hundreds of thousands of dollars above their reserve, and people do buy within their limits. Take it back 12 months ago, and people were high fiving and celebrating the success; last night we saw reality.

A lot of people expressed sympathy for the contestants that didn’t make a lot of money from their sale. Whilst this is a somber reminder, this is the reality of the gauntlet you run when you play the property market. There are thousands of everyday Australian’s that has missed out on gains from their own projects, with an even harsher rationality hitting them with no cameras, media interviews, endorsements after the hammer has hit.

But why did ‘The Block’ go wrong? Here are the main reasons:

1. The apartments were over capitalised: The contestants were trying to sell such a premium product, making investors very cautious. When people buy property, they want to see the potential upside and where they themselves can make money. The problem with having the apartments so impeccably finished, is it made it harder for buyers to add value. Because of that, they realised they were most likely buying them at the peak of their value. The reserves were set with what the production needed to get back to make it viable, and it seems they may have put too much money in to making a high end product.

2. Not even ‘The Block’ can triumph simple economics: A property price has a lot of factors that go in to its cost. But at a fundamental level, the rules of supply and demand hold firm. Prahran has seen a huge amount of redevelopment in the past 24-36 months. Trilogy apartments which is approximately 200 metres further up High Street, has 323 apartments on offer, with an apartment complex across the road also offering brand new apartments. With so much on offer, it’s hard to compete with buyers shopping for value.

3. The apartments were not necessarily built for the end consumer: It’s easy on a design show to create a beautiful showpiece, but this doesn’t necessarily transfer to practicality, or ensure you get your money back. People want value for money above anything, and some of the apartments were so lavish that it lacked genuine real living opportunities. It’s all good and well to live in a luxury masterpiece, but you have to ask if it provides a home for someone and if it is what they are after.

4. There were better properties on the market for that money: A simple reason to understand why consumers didn’t bid the properties up, is their belief they could get something better for those $$. If you have a look at other homes for sale, prospective buyers could have bought:

204/4 Cromwell Road, South Yarra

An open spacious apartment in South Yarra, available for less money.

Or, 3 Mary Street, Prahran for $1,030,000. Mary street offers three bedrooms, two stories and an open verandah on its on title of land.

3 Mary Street Prahran has 3 Bedrooms, and is a free-standing house and quoted at $1,030,000

Either way, the lessons learned are that reality TV shows aren’t necessarily the way to success and people won’t just buy anything. With strong demand, people do want to see value for money and something that can offer capital gains over the long term. Properties that are unique, have land, and potential upside for redevelopment will trump established apartments most of the time.