Is the REA Group Limited (ASX: REA) share price a buy?
It just reached an all-time high as the share price passed $100 in response to the Australian Prudential Regulation Authority (APRA) news.
APRA has decided to remove the 7% interest rate buffer required by borrowers and instead borrowers will only need to be able to show they can afford the loan with a 2.5% interest rate buffer instead.
The Reserve Bank of Australia (RBA) has also been responsible in sending the REA Group share price to the moon with it cutting Australia's interest rate to just 1%.
REA Group investors will be hoping that APRA's adjustment will mean potential property buyers are accepted for their mortgage applications, particularly in light of the interest rate cuts. This could mean a stabilising of the Australian house prices, perhaps even a return to growth.
This would allow REA Group to charge more for its advertisements (based on higher house prices) and, importantly, more properties hitting the market meaning there are more properties generating advertising revenue for the company.
Lower interest rates also have the effect of boosting share prices because a business is worth more to a shareholder if returns from cash are less than before. That's one of the main reasons we've seen the REA Group share price rise 12.1% over the past month.
Foolish takeaway
REA Group is now trading at 43x FY19's estimated earnings. Is that good value? It really depends what the earnings generated are in FY20 and FY21. If the housing market turns around and interest rates remain at this level (or lower) then perhaps this price isn't so bad.
It's trading at 34x FY21's estimated earnings. If the overseas international property site stakes that REA Group owns does well then it could still be one to watch, but I'm not a buyer at today's price.
