The REA Group Limited (ASX: REA) share price held up reasonably well during this COVID-19 downturn, but there are growing worries that things could soon change.
Shares in Australia's largest online real estate classifieds group dipped about 17% since the start of the year compared to the 20% drop in the S&P/ASX 200 Index (Index:^AXJO).
REA's performance also stands out against its smaller rival Domain Holdings Australia Ltd (ASX: DHG), which collapsed by nearly 30% over the same period.
Is the premium justified?
The question detractors will ask is whether REA deserves to be performing this well. While the rise in the market can be attributed to the flood of cheap money unleashed by central bankers, REA's fortunes are closely tied to the faltering property market.
It seems that the expected downturn in home prices is prompting vendors to avoid listing their properties on REA's website realestate.com.au due to costs.
Are vendors by-passing REA?
The amount of housing stock that's put up for sale could be significantly greater than what's listed on property websites, according to the Australian Financial Review.
Some buyer's agents (these are property agents who act on behalf of the buyer) told the AFR that so-called off-market properties have jumped by 50% since March.
Vendors are baulking at the thought of spending thousands upfront to list their properties on REA's and Domain's websites amid a weakening market.
Structural vs. cyclical
There is no official data on how widespread this challenge is, and it's difficult to say if property agents are encouraging this change in behaviour as they long have a love-hate relationship with REA. REA is the dominant leader by a mile and is used to dictating terms to agents.
It also remains to be seen if the move by vendors to turn to private buyer's networks to sell their homes will continue post the coronavirus crisis.
Property agents will have an interest in keeping this trend alive.
Lack of upgrades
Another interesting observation when comparing this housing market downturn to the last one about two years ago.
Back then, property prices fell around 10% but REA continued to report resilient profits as agents and developers increasingly used the company's premium advertising option to promote their properties.
So, while volumes dropped, this was offset by greater spend per customer on the REA platform.
This doesn't appear to be happening this time even though developers have a big reason to push their unsold properties.
Of course, this doesn't mean that REA's business model is broken. It's dominance in the market is likely to remain in tact for a while yet. Still, REA shareholders should be paying close attention over the coming months.
