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Why the Domain Holdings share price has plunged 30% since September

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It has been a tough year for the Australian housing market, with median house prices falling in our major cities, while property listings and auction clearance rates have also dropped significantly.

Australia’s second largest real estate marketing provider, Domain Holdings Australia Ltd (ASX: DHG), also appears to be bearing the brunt of the cooling housing market, with its share price falling more than 30% in the last 3 months.

Let’s take a closer look at why…

October trading update

Domain released a trading update on October 12, which covered the FY19 year to date (the prior 15 weeks of trading).

The key highlights include:

  • Digital revenue growth of 6%
  • Total revenue growth of 1%
  • Underlying costs up 1%
  • Total costs up 6%

Domain states that the cooling housing market has adversely affected the business due to lower new listings and auction volumes, as well as reduced levels of new development projects. The company reports that for the September quarter, auction volumes were down between 18-22% in Sydney and Melbourne, while new market listings were down 8% in Sydney and 1% in Melbourne.

This is clearly a troubling statistic for Domain shareholders, as fewer listings on and fewer advertisements in Domain’s print channels, result in the company generating weaker digital and print revenues.

However, Domain also highlighted some promising updates, including that the company is restructuring its digital media sales channels to adopt a fully programmatic offering, which should benefit the company’s margins in FY19 and onwards.

Property market outlook

I believe that the outlook of the Australian housing market is heavily weighing on the minds of Domain shareholders. AMP Capital recently revised its housing forecasts downwards, with chief economist Shane Oliver now believing it’s likely prices will fall 20% by 2020 primarily due to tighter credit conditions and growth in housing supply.

The housing market is also likely to be negatively impacted if the Labor party wins the federal election next May, with experts claiming its planned reforms to negative gearing and the capital gains tax will significantly reduce investor demand for Australian real estate, which could put further downward pressure on property prices.

However, I believe the impact of the cooling housing market is being overplayed, as falling house prices aren’t a major concern for Domain per se, with the real issue being the falling number of new listings.

I have previously argued that a cooling housing market could actually be beneficial for real estate listing sites like Domain and REA Group Limited (ASX: REA); as sellers are likely to spend more on the marketing of their properties to stand out from the crowd. In addition, with properties experiencing a longer time on the market, sellers will inherently have to spend more on their Domain listings to keep their property advertised online.

Foolish takeaway

It may not all be doom and gloom for Domain shareholders, particularly if more properties list on the market throughout summer, which is typically the busiest time of the year for residential real estate. If you’re optimistic about the outlook of Domain, it could be a good time to buy shares in the company, while it trades at a significant discount relative to earlier this year.

However, with the company still trading at a price-to-earnings multiple of 32x, I’ll happily sit on the sidelines for now, with Ltd (ASX: CAR)and Trade Me Group Ltd (ASX: TME) being my preferred ways of gaining exposure to the online classifieds space.

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Motley Fool contributor Gregory Burke has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Limited and REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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