Ann: REA Group Q1 FY 2019 financial information released, page-17

At least 1 market commentator has suggested that a housing market downturn will be good for REA and drive profit growth. The argument is that in a market slowdown total listings will actually rise due to longer time on market. But will this lead to higher revenues for REA?

REA has consistently traded at PE's well in excess of the market average, underpinned by it's strong earnings growth. But with a market share to defend and declining house prices, perhaps we are in the slumber zone between the party and the hangover. But is a slowdown the panacea? There are good arguments in support of this case but I'm inclined to think this is creating a a narrative to support a wish.

Once seller fatigue sets in a vendor may seek other ways to reduce costs such as allowing the property to slip down the page rankings, seek a lower cost package , go it alone without an agent or even pull the listing. These are actions that are likely to lag the 'time on market' indicators, but we are moving into behavioral science here.

There is however more concrete evidence of market sentiment hurting profits, REA made a $182M write down as recently as 2017. REA stated that this was the result of 'a downturn in conditions in Asia' In that statement they linked the impairment charge to the fall in the number of properties sold in certain markets and didn't mention whether listings had been impacted. The company currently carries almost $1B in intangible assets on its balance sheet, making up 55% of total assets. It is worth re-reading that statement released to the ASX on the 29 June 2017 in the context of the current market in Australia.

I am a great admirer of this business and have wanted to own some of it for many years. It is my perception of it being overvalued that has prevented me from buying but the growth rate has always proved me wrong. However, I will stick to my guns in a hope that at some point the company might fall to a valuation I am comfortable with. And I'm hoping the current soft property and equity markets might be the catalyst, but perhaps I'm falling into the trap of wishful thinking myself!

I am also interested in other's views of drivers for earnings and revenue, they may well be different than the past. But I think it is drawing a long bow to suggest that what a company which has performed so extraordinarily well during a boom needs is a bust.