Australian house prices are rising again, does that make the REA Group Limited (ASX: REA) share price a buy?
Since 14 May 2019 the REA Group share price has gone up 31%. The federal election win by the Liberals has been a big boost for REA Group. It seemed like property prices were going to keep going lower for the rest of 2019, but there was a big turnaround in the last few months.
According to CoreLogic's research, national Australian house prices went up by 4% in just the December 2019 quarter, which was largely driven by Sydney and Melbourne house prices rising by 6.2% and 6.1% respectively.
I think it's fair to argue that REA Group could increase its prices just so that its fee is the same percent of the overall selling price as it was at June 2019. Digital advertising is one of the most important aspects of selling a property these days. Most potential property buyers research on the website or app. More potential buyers means a higher chance of a bidding war.
REA Group's Australian digital assets get substantially more viewing time than Domain Holdings Australia Ltd (ASX: DHG). This powerful market position means buyers and sellers are more likely to go to realestate.com.au first because there are more buyers and more properties for sale, this is a pleasing cycle that keeps REA Group at number one and allows it to keep raising prices.
The only thing that's really holding REA Group back now is listing volumes. Despite a growing population and rising property prices, there are not as many properties on the market. That may change in 2020, we'll have to see.
Over the long-term I expect that REA Group's international property website assets could generate some very useful assets for the business.
Foolish takeaway
I like that REA Group can make money off every single property that is up for sale (or rent). It does look fairly expensive at 37x FY21's estimated earnings, but what quality growing company doesn't look expensive these days?
