The Australian Reserve Bank has been aggressively increasing interest rates over the past few months—a trend that is prominent worldwide. It has led to an 8.4% decline in the country’s housing market, the worst in about four decades. People are strapped for cash, attempting to cut corners and keep within budgets. Suffice it to say, real estate does not make it to the top of their priority list, and it is showing.

High interest rates—coupled with increased operating expenses—have lowered earnings for real estate advertising company REA Group (ASX: REA), as people put off investing in homes. The Company’s EBITDA has fallen 2% to $359 million, with its profit down 9% to $205 million in H1 FY23. 

REA Group Chief Executive Officer, Owen Wilson, commented, “The Australian property market was heavily impacted during the first half by unprecedented consecutive interest rate hikes. While underlying demand remained healthy, uncertainty around future interest rate movements caused some sellers to pause and buyers to re-calibrate as borrowing capacities fell.”

Still, REA’s revenue grew by 5% to $617 million, with its India arm playing a significant role as revenue there grew by 48% on H1 FY22. 

Besides high interest rates reducing demand, wage inflation resulted in increased expenses for REA. Its Australian core operating costs increased by 7% due to higher employee costs, investments and travel costs, and strategic marketing initiatives. This, along with higher costs in India from continued investment in people, marketing and increased revenue-related cost, increased the Company’s operating costs by 15% to $258 million.

As costs increased, listings declined. In Q2 FY23, national residential listings fell 21% after increasing 22% in Q2 FY22. While Sydney took a massive hit of 34%, Melbourne followed closely behind at 31%. These declines are significant compared to FY22, when Sydney listings were up almost 40% in Q2 FY22 and Melbourne was up by 79% in Q1 FY22. Overall, in H1 FY23, national listings fell by 9%.

Not only are people having to pinch their wallets, but there are also slim pickings with regard to houses available right now. Still, REA managed to boost its residential revenue by 5% to $425 million, with an 11% increase in Buy yield, benefitting from a 6% average price rise across Australia and REA’s launch of Premium+. 

Besides buyers, developers have also become more hesitant to trade in this environment. The Company’s developer revenue declined due to a lack of new projects, labour shortages and unsure developers. 

REA claims that despite these downfalls, its flagship business—realestate.com.au—is doing well, ushering in millions of new users and enquiries every month. In India, its subsidiary Housing.com shouldered the bulk of the revenue. An increased focus on search engine optimisation (SEO), improved mobile experience and targeted marketing has driven audience growth of 36% YoY. But more users does not equate more buyers.

The current economic environment is not just tormenting REA but real estate companies at large. For instance, the Company’s investment Move, which operates realtor.com, also suffered a 10% decline, thus resulting in an equity loss of $7 million.

In the coming months, REA expects things to get worse as sentiments are likely to remain the same. Plus, its increased planned investments in India will lead to more EBITDA losses and high group costs. 

Wilson concluded, “The uncertainty caused by rising interest rates is likely to continue in the coming months but we do expect that when interest rates stabilise we will see increased activity in the property market. The Australian economy is strong, unemployment is low and immigration is increasing. Each of these underpin our property market.”

The Board has determined to pay a final dividend of 75.0 cents per share fully franked, flat YoY.