Why the REA (ASX:REA) share price could be in for an ‘earnings super cycle’

Morgan Stanley thinks the REA Group Ltd (ASX: REA) share price could see further upside thanks to a roaring property market

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Super Retail share price upgrade buy re-rating A drawing of a a superhero businessman in fron of a cityscape in silhoutte, indicating a share price earnings super cycle

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The REA Group Ltd (ASX: REA) share price has bounced back strongly in April and is within ~5% of its previous all-time record high of $163.75.

Its shares have shrugged off previous concerns regarding rising bond yields and broader weakness in tech shares

Morgan Stanley bullish on the REA share price 

On Wednesday, Morgan Stanley released a note that suggested a potential “earnings super cycle” in 2021-22 driven by positive listings growth and additional houses for sale. The broker believes there is evidence that Australians are re-thinking where they want to live and searching for new homes.  

The broker rated the REA shares as overweight with a $175 target price. 

CoreLogic data sees housing data soar 

A bounce back in economic activity, record low interest rates and rising consumer sentiment has catapulted housing data metrics to new record highs. 

CoreLogic’s national home value index recorded a 2.8% increase in March, the fastest rate of appreciation since October 1988. The index is now 5.6% above the previous market peak in October 2017. 

Looking at auction volumes, CoreLogic reported 19,004 homes taken to auction across five combined capital cities over the three months to March 2021. This compares to 20,489 over the December quarter, and 18,902 for the prior corresponding period. 

Then comes clearance rates, which have reached 80.0% over the first quarter of 2021. Weekly auction clearance rates across capital cities have only been at or above 80% five times since 2008, reiterating the robust property market. 

Buyers outpacing sellers 

Domain Holdings Australia Ltd (ASX: DHG) has described current property conditions as one where demand is outstripping supply

“I think we’re currently seeing a depletion of current stock in the market, where buyers are absorbing all the old listings as well as the new as there’s a real shortage of supply,” said Domain senior research analyst Nicola Powell.

Powell made a comment that bodes well with Morgan Stanley’s narrative of a potential super cycle in 2021-22 saying:

With low listings, we’ve achieved good prices, but the momentum going forward we feel will encourage more people to put their properties on the market in the hope of getting 15, 20 or 25 per cent over what they might have got 12 months ago.

And, then, worst case scenario, they’ll just rent until more property comes on.

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Motley Fool contributor Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia has recommended REA Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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