In a worrying sign that a global credit crunch may well be on the way, the news that new car sales are slumping in the US is similar to a scenario unraveling in Australia. Part of this is due to reduced disposable income, and lower average household spending is often one of the key indicators of a slowing economy.
However, there are two essential conditions that are repeatedly causing the market problems, and they are entirely different from those that brought about the global financial crisis back in 2008.
Although global recessions go in cycles, they do not always follow the same patterns, and Australia’s predicament is because of the banks tightening their lending capacity following the Royal Commission inquiry into financial misconduct. The property market has begun to slow down, which is also part of the fallout from the inquiry but more nuanced in nature.
The inquiry meant that banks stopped handing out loans that customers were more likely to default on, but the average house price had already peaked by then, and many were calling for a way to de-escalate it. Even Prime Minister Scott Morrison, who has made it no secret that he is not a fan of state intervention in the market, has said that housing prices need to come down, albeit slowly.
With the housing market facing issues, fewer people are buying homes for more money, and some are not even fetching a profit. This is affecting the amount of disposable income that people have, and although wages are in a growth period, more people are having their loan applications rejected as a result of the Commission’s recommendations. In turn, fewer people are wanting to buy new cars.
Although car sales are down for the first time in four years, the picture is not bleak yet. Sales reached record levels in 2017 at almost 1.2 million, and they were only down about 36,000 in 2018. While a decrease is never ideal, unless the trend continues to move downward sharply, the current situation regarding car sales will not cause too much concern.
In a sense, the automobile market mirrors the way that the housing market moves, and although unparalleled growth cannot last forever, the conditions that cause house prices and car sales to start dropping precipitates whether industry experts begin to worry.
While a 3% drop does not represent a crisis, it does mean that the Federal Chamber of Automotive Industries (FCAI) has its work cut out for it in trying to stimulate growth in the industry. FCAI CEO Tony Weber said that the new figures ‘reflect a challenging climate across the Australian economy, including a slowing housing market, tightening of money lending and the drought.’
The Automotive Holdings Group, the largest car dealership in Australia, has seen its share price drop by 5% upon the release of new sale figures and has come down a whopping 60% since reaching a peak back in March 2017. It seems likely that this trend is set to continue for the near term, so how the automotive industry deals with these issues could be a marker of events to come.