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As share investors, no doubt you are well aware of Australia’s unhealthy obsession with real estate.
Property seems to be at a fever pitch especially right now, despite COVID-19 lockdowns affecting half the country’s population.
On the back of near-zero interest rates, Australia’s median house price has climbed to a new record of $955,927, according to Domain.
That’s 5.8% growth in the last quarter and an eye-watering 18.8% for the past year.
This ballooning of prices means rental yields have shrunk. Gross rental yields have tumbled to about 4%.
So what does this have to do with ASX shares?
The ASX share that takes advantage of the real estate fervour
According to Montgomery Investments chief investment officer Roger Montgomery, there is a quality stock one can buy to leverage Australia’s disproportionate appetite for real estate.
“REA Group Limited (ASX: REA) is a super-high-quality business that has been growing revenues for years, despite declining listings,” he wrote on the Montgomery blog.
“A tight focus on costs and efficiencies, along with the ability to raise prices and charge for add-on features, has enabled the company to report growing revenue over the years.”
Last month, Montaka Global Investments pointed out that REA stocks had multiplied an incredible 900 times in 20 years. That’s better than Amazon.com Inc (NASDAQ: AMZN)’s 535-fold increase over the same period.
Try to find a house purchased in 2001 that’s multiplied its value 900 times over.
“Perhaps now is the time to be selling the investment property and buying REA?” Montgomery said.
REA shares are in a dip right now
REA has already reported its 2021 financial year results which were in line with expectations. But its shares have been punished.
“Since the full year results announcement on 6 August 2021, the share price has fallen 10%,” said Montgomery.
“The company’s articulated uncertainty about listing volumes and flow-through impacts of renewed and expanding COVID-19 lockdowns on property inspections, and therefore listings, are likely the reason for the recent selling in the share price.”
Real estate listings have dried up, with Montgomery recalling a recent conversation with an agent on the lower north shore of Sydney.
“Pickings are slim, with listings way below anything regarded as ‘average’,” he said.
“One real estate agent in Manly, Sydney told me normally there should be 130 properties listed at any time. At the time of writing, that number amounts to just 28.”
But according to Montgomery, this should not worry investors who hold for years.
“In the long-term, we expect the highly-anticipated and long-awaited normalisation of listing volumes to eventuate. This will, when it eventually occurs, provide a massive boost,” he said.
“Imagine how much the company could earn if Manly listings (reflecting all suburbs) rise from 28 properties back to 130-odd.”