Rising mortgage rates have combined to put a big hand brake on residential property listings. Since October, listings have fallen heavily, particularly in Sydney and Melbourne, causing Domain to swiftly haul in its cost base.
DHG’s trading update amplified the news from the November AGM that residential property listings have gone backwards since October. After a 4% growth in 1Q23 listings, October (-16%) November (-22%) and December to date (-51%) have brought DHG’s growth plans to a rapid halt and instead forced the company to quickly tighten its belt.
Sydney and Melbourne listings were down 38% and 32% respectively in November and have halved in December so far, compared to last year when activity was vigorous as pandemic restrictions eased.
In August, DHG had presented a healthy FY22 result and was brim full of confidence to expand its depth products and invest meaningful amounts into its newly acquired businesses to advance its Marketplace strategy.
This would entail lifting the cost base from $227 million in the mid-to-high single digit range alongside the investment in targeted initiatives. The outcome was meant to result in stable EBITDA margins and FY23f EBITDA of approximately $155 million on revenue growth of ~10%.
FY23 would also see the full year impact of the FY22 acquisitions on IDS and Realbase that would add approximately $27 million to on-going operating expenses.
By November, DHG had already seen the slowdown in listings as becoming meaningful and had implemented cost savings initiatives to the tune of $21-26 million ($6m impact in 1H23). The adjusted FY23 cost base is now $250-255 million ($135m in 1H23), down from $275-280 million.
Investment View
It was perhaps disingenuous of DHG to not mention the elephant in the room. Rising interest rates since the RBA began tightening policy in May 2022 have quickly hosed down the enthusiasm in the residential property market. The 2021 recovery from the pandemic is fading and there is a wall of worry for many homeowners who are facing a big step change up from the expiry of low fixed rate mortgages in 2023 and beyond. Corelogic data for 2022 shows capital city listings down -33% in the last 4 weeks although this is well ahead of REA’s Proptrack measure showing -22%.
DHG (and REA) will be anticipating that listings deferred in Spring will appear in the Autumn, but we will have to wait until February for the early evidence.
Housing market conditions should remain challenging in 2023 with a couple of factors impinging. Firstly, the RBA likely has two further rate rises before pausing. Next, house price declines have been modest so far, but could continue to sap vendor confidence. Extraordinary weather conditions across eastern Australia in 2022 have also muddied the market.
Listing volumes may be down around 8% for FY23, but DHG has been steadily building a portfolio of products and adjacent businesses that are aimed at increasing the effectiveness and yield of the selling (and buying) process in residential property. This is offsetting listing volume declines to some extent. The swift clamp down on the cost base does put a brake on the initiatives planned to expand on yield-related projects.
Consensus earnings forecasts have been only modestly downgraded on this news leaving DHG still valued at over 27x FY23f EPS. With a solid headwind of much higher interest rates ahead in 2023, we think the housing market is in for a tougher time, with further risks to earnings. DHG has higher operating leverage than REA which will accentuate falling listing volumes. Whilst DHG is a strong second player in the market, REA remains the higher quality company.
Risks to Investment View
Growth in listings volume may be resilient despite rising interest rates. Yield growth may compensate for lower listing volumes.
Recommendation
We have reduced our recommendation to Sell from Buy.
Figure 1: Number of new listings have continued to slow since first interest rate rise in May 2022
