Opinion
Auction tip took a hammering
677 words
Herald-Sun
1 - FIRST
18
English
(c) 2003 Herald and Weekly Times Limited
THERE are two types of movie reviewers I like.
There are those whose opinions I always agree with and there are
those I never agree with.
Both are equally useful.
Listening to either I can work out accurately whether a movie is
worth going to.
Businesses and investors often rely on economic opinions.
As an economist, I would like to think of myself as someone who is
useful because I get my economic predictions right.
But when it comes to auctions it appears I am the other type of
economist: equally useful, but completely wrong.
Let's recap.
Last week I made a bold prediction. Based solely on economic
studies of auctions, I forecast the four apartments in The Block would sell for
progressively lower prices as each came up for auction.
Let's review the selling prices as they emerged: first, $655,000,
second, $670,000, third, $747,000 and finally, $751,000. With each drop of the
hammer a progressively higher price.
Suffice it to say this is less than a glowing testament to my
predicting ability.
Is this the end of my economics career? Fortunately, I don't think
so.
You see, I took some "economist's insurance". My
prediction was: "all other things being equal" the prices would
decline.
But all other things are rarely equal: an economist always has an
out.
It is always worth being somewhat sceptical about economic
predictions with this qualifier.
For starters, you have to ask: equal to what?
In this case, I based the prediction on experience in wine and
spectrum auctions.
Do you think apartments are equal to those? Obviously
not.
So why did I think they might be?
Simply put, apartment prices are driven by a common factor: the
value of the land they are on.
We have seen housing prices rising over all of
Low interest rates, increasing population and even stamp duty are
common to all.
This is why these things are the focus of the new inquiry into
housing affordability.
But when it came to The Block, the units had even more in common:
the same address, size, age and approximately the same renovating budget.
But there were some things that were still different.
One, except for hair colour, each had a different renovator and two, the auctions were part of one of the biggest TV events
of the year.
Different tastes of different couples can explain some price
differences, but $100,000? If that was the case, the Treasurer would have a
simple task in making houses more affordable: shrink the bathroom, lay the
floorboards badly, drop the study and put a water feature in the courtyard.
In the end, we know that it took less than $50,000 to make the
winning apartment from its renovator's delight condition.
Surely, it would be much less than $100,000 to transform Phil and
Amity's handiwork?
Cosmetic differences can't really account for this.
The media attention was more likely the culprit.
But it's not obvious how.
After all, a newspaper and Crazy John bought the first two units
on the Saturday.
This made sense as doing so maximised their publicity and free
advertising.
BUT on Sunday, the higher prices were paid by bidders with
apparently no additional motive.
What we are really left with is the inadequacy of economics, but
only up to a point.
The picture we have here is hardly a picture of efficiency at
work.
Similar units sold for vastly different prices.
And this happens all the time in housing markets.
The experience of the last week only serves to reinforce my main
point: selling houses in sequence, as we do all the time, is no way to run an
auction and no way to run a housing market.
So, there is still a reason to listen to the economists, if only
because some are always wrong.
Professor JOSHUA GANS is an economist at the