Luxury cars in retreat along with home pricesEconomic perspective
New vehicle sales: Yesterday the Federal Chamber of Automotive Industries reported that new vehicle sales hit a record high of 1,201,309 units in the year to March, up by 2.5 per cent on a year ago.
Luxury vehicles: In contrast to the broader market, the CommSec index of luxury marques has been falling. In fact luxury vehicle sales hit record highs in the 2016 year with sales totalling 106,658 units. In the period since, annual sales of luxury marques have fallen by almost 7 per cent.
Home prices: Also this week, CoreLogic reported data on home prices. The CoreLogic Home Value Index of capital city home prices fell by 0.2 per cent in March to stand 0.8 per cent higher over the year. The national home price index was flat in March to be up 1.2 per cent over the year. It was the smallest annual growth in national prices in over five years.
What does it all mean?
When luxury car sales are in retreat you can bet that home prices aren’t far behind. That has been the case since the early 1990s. And indeed that’s the case now. Improved affordability has allowed Aussies to upgrade their rides. And indeed rising affordability for a raft of items from cars to clothing to food and to travel have given Aussies extra purchasing power to buy homes.
The lead-lag relationship between cars and homes has shifted over time. In 2017 it was luxury vehicle sales that started to soften ahead of home prices. Double-digit annual gains in luxury vehicle sales had been in place from 2013. But in late 2016 gains in affordability peaked in line with a lower Australian dollar and stable interest rates.
Annual sales of luxury marques started falling in early 2017 and home price growth was slowing around the same time. For the first time in almost six years home price growth is slowing at the same time that annual sales of luxury vehicles are falling. In 2013, luxury vehicle sales lifted as the benefits of a strong currency were passed through to buyers. Car and home sales lifted from 2013-2016 in response to lower interest rates.
The question is what will be the new drivers of luxury vehicle sales and home prices in 2018. The Aussie dollar is marking time along with interest rates. If there is a consolidation in luxury vehicle and housing markets, Aussie consumers may shift their spending intentions elsewhere. Fundamental changes are happening in household consumption so investors and analysts alike need to be alert.
What do the figures show?
According to the Federal Chamber of Automotive Industries (FCAI), there were 106,988 new vehicle sales in March, up 1.5 per cent over the year. In the twelve months to February sales hit a record 1,201,309 units, up 2.5 per cent on a year ago.
To get a gauge of the luxury market, CommSec tracks the sales of 17 luxury marques: Aston Martin, Audi, BMW, Bentley, Ferrari, Hummer, Jaguar, Lamborghini, Lexus, Lotus, McLaren, Maserati, Maybach, Mercedes-Benz, Morgan, Porsche, and Rolls Royce.
In 2016, sales of luxury marques totalled a record 106,658 units. But that was the peak. In 2017, luxury vehicle sales were down by 5.7 per cent on a year earlier – the biggest annual decline in eight years.
Annual sales of luxury vehicles have fallen further in 2018. In the year to March, sales of luxury cars & SUVs totalled 99,625 units, a 25-month low and down 5.4 per cent on a year ago.
Quite remarkably sales of luxury vehicles have tracked movements in home prices over time. Monthly growth of capital city home prices peaked in November 2016. After ebbing and flowing in late 2016/early 2017, growth of home prices slowed from mid-year with prices starting to fall in October 2017.
What is the importance of the economic data?
The Federal Chamber of Automotive Industries releases estimates of car sales on the third business day of the month. The figures highlight the strength of consumer spending as well as conditions facing auto & components companies.
The CoreLogic Hedonic Australian Home Value Index is based on Australia’s biggest property database. Unlike the ABS Index, which excludes terraces, semi-detached homes and apartments, the CoreLogic Hedonic Index includes all properties. Home prices are an important driver of wealth and spending.
What are the implications for interest rates and investors?
The luxury vehicle market soared from 2013-16. Home prices similarly soared in many capital cities over the same period. But now both markets are in consolidation mode. If fewer dollars are spent on homes and luxury vehicles, consumers may pay attention to other interests. In 2004 and 2005 when home prices softened and luxury vehicle sales flattened, more Australians travelled overseas. Annual growth of tourist departures hit a record 28.8 per cent in the 2004 calendar year.
Traditional retail spending may also benefit if ‘top end’ sales activity slows together with spending on services like health, hospitality and education.
Aussie consumers may also devote extra dollars to paying down debt and lifting savings. Clearly these are interesting times for consumer-focussed businesses.
Published by Craig James, Chief Economist, CommSec