Luxury vehicle sales lift for first time in 2 years
CommSec Luxury Vehicle index: For around a decade, CommSec has been tracking an index of luxury vehicle sales. The reason? Changes at the ‘top-end’ of markets – vehicles, houses and other assets – have tended to lead activity more broadly. We update the latest trends in luxury vehicle sales.
Luxury vehicle sales: The CommSec index of luxury marques peaked in the 2016 calendar year with sales totalling 106,658 units. Rolling annual sales fell to 4-year lows in June. But for the first time in two years, rolling annual luxury vehicle sales rose in July, coinciding with a lift in home prices.
The vehicle sales data provides guidance on consumer spending as well as conditions for the Autos and Components sector of the sharemarket.
What does it all mean?
• In September 2017, CommSec published a report “Luxury vehicle sales peak: Omen for homes”. We updated the report in April and August 2018 and January 2019. This report updates recent developments.
• When luxury vehicle sales are in retreat you can bet that home prices aren’t far behind. That has been the case since the early 1990s. So it is notable that – despite annual sales of new vehicles continuing to fall – luxury vehicle sales lifted in July for the first time in two years. And in the same month, home prices edged slightly higher.
• It is early days, but it will be useful to monitor the situation closely over the next few months to gauge whether economic activity more broadly is starting to lift.
• 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.
• It is important to note however that the lead-lag relationship between vehicles 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 and vehicle sales slowed 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 also slowed around the same time. In late 2017, and for the first time in 6½ years, home prices were falling in annual terms at the same time that sales of luxury vehicles were falling.
• In the previous cycle, back in late 2012, luxury vehicle sales recovered as the benefits of a strong currency were passed through to car buyers in the form of cheaper prices. And both vehicle and home sales lifted from 2013-2016 in response to lower 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 2018. In the period since, new vehicle sales have fallen by 8.5 per cent. The rolling annual total is still falling, hitting 6½-year lows in July.
• To get a gauge on the luxury market though, 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. And in the period to June 2019, rolling annual luxury vehicle sales fell by 19.7 per cent, hitting 4-year lows. But in July 2019, rolling annual sales lifted for the first time in two years.
• Luxury vehicles now represent 10.4 per cent of all combined passenger vehicle and SUV sales, still below the record high of 11.5 per cent set in the year to December 2016. Until late 2016 the proportion of vehicle sales devoted to the luxury market had been steadily rising over time. Despite the recent slowdown, the luxury vehicle market share is still around double the levels of 13 years ago. Sales of all luxury marques now represent 7.8 per cent of all vehicles, down from the record high of 9.0 per cent in calendar 2016.
• Using January 1995 as a starting point (January 1995=100) the CommSec luxury vehicle index stood at 716.1 in July 2019 versus 161.1 for the broader passenger/SUV market. In other words, while passenger/SUV sales are around 1.6 times higher than 23 years ago, the number of luxury vehicles sold has risen seven-fold over the same period.
• Despite the recent slowdown, luxury vehicle sales are still healthy with rolling annual sales of Rolls Royce at record highs in July while annual sales of Lamborghini and Bentley marques were just off record highs.
Rising wealth & affordability
• The increased importance of luxury vehicles in the broader vehicle market is a function of rising wealth levels and better vehicle 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 vehicle sales.
• And while wage growth has slowed in recent years, Australian wage earners continue to enjoy a marked improvement in real wages, that is, wages outstripping prices. Average weekly earnings have risen by 38 per cent over the past decade, ahead of a 23 per cent increase in consumer prices.
• For the new vehicle market as a whole, vehicle affordability has markedly improved in recent years. In fact, according to the CommSec Vehicle Affordability measure, vehicle affordability is at the best levels ever recorded. It now takes a worker on average earnings just under 21 weeks to buy a new Holden Commodore, down from 28 weeks of wages just five years ago and 32 weeks of wages a decade ago.
• Until recently vehicle affordability hadn’t just been improving for the top volume selling vehicles. At the top end of the vehicle market, wealth and real wages had been rising solidly, while prices of luxury marques had been flat or falling. Wage earners had been looking to upgrade their rides over time, pushing more sales into the luxury vehicle category.
• But a lower Australian dollar, flattening of wealth gains caused by lower home prices and slower growth of nominal wages have capped luxury vehicle affordability. Today it takes a worker on average earnings 42 weeks to buy a new BMW 320d. While around the same as seven years ago, affordability is off the best ever levels of 35.55 weeks in December 2018.
Luxury vehicles, houses & spending: Past cycles
• Over time, luxury vehicle sales have proved useful as an indicator of consumer trends, reflecting their increased importance in the broader vehicle market. In fact, around a decade ago, luxury vehicle sales bottomed in annual terms, preceding a more general improvement in the vehicle market by around two months. But the lead-lag relationship has varied over time. Back in 2003, a slowdown in the luxury vehicle market was in evidence around a year before a downturn in the broader vehicle market.
• The slowdown in the luxury vehicle 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 vehicle sales and ahead of the broader vehicle 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 home prices and luxury vehicles, around 15 years ago a downturn in the housing market actually led the slowdown in new vehicle sales. That is, the decline in housing wealth led to weaker spending on goods such as vehicles. At that time, the Reserve Bank tightened monetary policy decisively between August and December 1994, causing home prices to flatten over 1995. Luxury vehicle sales then followed the softening of home prices, trending sideways over the 1995/96 financial year.
• The annual growth rate of luxury vehicle sales peaked in December 2009 while annual growth of broader passenger vehicle 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 vehicle 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. From 2017 until recently both the luxury vehicle market and key capital city housing markets have been in consolidation mode.
• The softening of new vehicle sales and home purchases in recent years wasn’t necessarily negative. Supply and demand constantly adjust over time. But with employment growth strong, real wages rising and with interest rates near record lows, fundamentals for car and home purchases remain solid.
• There are now signs that luxury vehicle sales are lifting. Home prices in Sydney and Melbourne have also recently started to lift. The removal of election uncertainty and lower interest rates are supporting housing demand. Firmer home prices should also give motorists encouragement to upgrade their rides, although constrained by slow growth in nominal wages.
• The relationship between luxury vehicle sales, home prices, broader new vehicle sales and broader consumer spending are worth close monitoring.
Published by Craig James, Chief Economist, CommSec