Luxury car sales ease along with home pricesEconomic perspective
CommSec Luxury Vehicle index: For around a decade, CommSec has been tracking an index of luxury cars. Changes at the ‘top-end’ of markets – cars, houses and other assets – have tended to lead activity more broadly. We update the latest trends in luxury car sales.
Luxury vehicle sales: The CommSec index of luxury marques peaked in the 2016 calendar year with sales totalling 106,658 units. In the period since, annual sales of luxury marques have fallen by almost 11 per cent. Broader car sales peaked in March and have now turned down.
Home prices: The CoreLogic Home Value Index of national home price index fell 0.6 per cent in July to be down 1.6 per cent over the year – the biggest annual fall in six years. Home price growth started to slow from November 2016, around the same time that luxury vehicle sales started to soften.
What does it all mean?
On September 18 2017, CommSec published a report “Luxury vehicle sales peak: Omen for homes”. We updated the report on April 6 2018: “Luxury cars in retreat along with home prices.” This report updates recent developments.
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 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.
But the gap between wage and price growth has narrowed. And home prices are no longer soaring in key population centres like Sydney and Melbourne. So both the new vehicle market and housing market are slowing at the same time. And the ‘top-end’ of both markets are leading the slowdown. That is not necessarily negative, Aussie consumers may switch their gaze elsewhere. And indeed growth of retail spending has lifted.
Quite remarkably sales of luxury vehicles have tracked movements in home prices over time. Monthly growth of national home prices started to slow 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. The current 0.6 per cent monthly fall in home prices is the biggest in almost seven years.
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 6½ 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 2019. The Aussie dollar is marking time along with interest rates.
The CommSec Luxury Vehicle index
According to the Federal Chamber of Automotive Industries (FCAI), new vehicle sales peaked at 1,201,309 units in the year to March. In the period since, vehicle sales have fallen by 1.1 per cent.
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.
Sales of luxury marques hit peak levels of 106,658 units in the year to December 2016. In the period since, luxury vehicle sales have fallen by 10.6 per cent. Annual sales are now the lowest in 2½ years.
Clearly luxury vehicle sales have had a good run, tracking the increase in wealth and rising levels of car affordability to their record highs.
Luxury cars now represent 10.6 per cent of all combined passenger car and SUV sales, below the record high of 11.5 per cent set in the year to December 2016. Until late 2016 the proportion of car sales devoted to the luxury market had been steadily rising over time. Despite the recent slowdown, the luxury vehicle market share is double the levels of 13 years ago. Sales of all luxury marques represent 8.1 per cent of all vehicles, down from the record high of 9.05 per cent in calendar 2016.
Using January 1996 as a starting point (January 1996=100) the CommSec luxury car index stood at 806.1 in July 2018 versus 176.9 for the broader passenger/SUV market. In other words, while passenger/SUV sales are around 1¾ times higher than 22 years ago, the number of luxury cars sold has risen seven-fold over the same period.
Despite the recent slowdown, luxury vehicle sales are still healthy with rolling annual Lamborghini sales at record highs and Ferrari sales just off record levels.
Rising wealth & affordability
The increased importance of luxury vehicles in the broader car market is a function of rising wealth levels and better car affordability. In real terms, per capita wealth has almost doubled over the past 14 years, broadly matching a similar increase in the share of luxury car sales.
Until the past year, Australian wage earners also enjoyed a marked improvement in real wages, that is, wages outstripping prices. Average weekly earnings have risen by 41 per cent over the past decade, ahead of a 23 per cent increase in consumer prices.
For the new car market as a whole, car affordability has markedly improved in recent years. In fact, according to the CommSec Car Affordability measure, car affordability is at the best levels ever recorded. It now takes a worker on average earnings around 23 weeks to buy a new Ford Falcon, down from 26 weeks of wages just five years ago and 32 weeks of wages a decade ago.
But car affordability hasn’t just been improving for the top volume selling vehicles. At the top end of the car market, not only have wealth and real wages been rising solidly, but prices of luxury marques have been flat or falling. And wage earners have been looking to upgrade their rides over time, pushing more sales into the luxury car category.
Today it takes a worker on average earnings just 36 weeks to buy a new BMW 318i, down from almost 50 weeks of wages just over five year ago.
Luxury cars, houses & spending: Past cycles
Over time, luxury car sales have proved useful as an indicator of consumer trends, reflecting their increased importance in the broader car market. In fact, around nine years ago, luxury car sales bottomed in annual terms in July 2009, preceding a more general improvement in the car market by around two months. But the lead-lag relationship has varied over time. Back in 2003, a slowdown in the luxury car market was in evidence around a year before a downturn in the broader car market.
The slowdown in the luxury car market in 2008 coincided with a peak in the housing market, providing validation for the start of the slowdown. And the annual decline of home prices bottomed out in early 2009, again in line with that of luxury car sales and ahead of the broader car market. Moves by the Federal Government to support building, home sales and home prices were largely successful, also serving to boost consumer confidence and spending.
While there is a close relationship between trends in house prices and luxury cars, around 15 years ago a downturn in the housing market actually led the slowdown in new car sales. That is, the decline in housing wealth led to weaker spending on goods such as cars. At that time, the Reserve Bank tightened monetary policy decisively between August and December 1994, causing house prices to flatten over 1995. Luxury car sales then followed the softening of house prices, trending sideways over the 1995/96 financial year.
The annual growth rate of luxury car sales peaked in December 2009 while annual growth of broader passenger car sales peaked in April. Annual growth of home prices peaked in June 2010.
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 were up 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 if not buying cars or homes or if home prices are easing. Clearly these are interesting times for consumer-focussed businesses.
Published by Craig James, Chief Economist, CommSec
Luxury car sales ease along with home pricesEconomic perspective