Why car sales could be headed for a fall
Lately, we’ve seen a decent bounce in second-hand car sales, which is reflected in the rising share price of Australia’s largest listed car dealer, AP Eagers. But the big concern for dealers is that this uplift is being caused by the government’s economic stimulus measures, and that times will get very tough when the stimulus ends.
Car dealers’ tough times began long before coronavirus hit our shores. ASIC’s move last year to ban flexible commissions on car loans for example, coupled with tightened lending by banks and, by extension, automotive finance companies, has adversely impacted an important revenue generator for dealers. Indeed, the same forces saw Carsales.com write down the carrying value of its half share in Stratton Finance by more than 80 per cent of its previously disclosed goodwill.
ASIC’s inquiry into car financing practices was just the tip of the iceberg. The ACCC’s inquiry into insurance-writing practices, an emissions standards scandal, the Takata airbag recall, flat wage growth, a retail and residential construction recession, the bushfires and then COVID-19 all added to the tectonic shifts that are represented by electric vehicles and ride sharing. And despite Australia ranking in the world’s top ten for number of vehicles per capita, our small population is served by some 58 brands, meaning higher overheads and slimmer margins for dealers as well as frequent brand turnover impacting consumer confidence.
Recently, our team listened in to a broker-sponsored automotive sales panel discussion and it revealed a fascinating insight into the automotive trade’s economic woes and hopes.
Since 2006, new car sales have grown at an annual rate of about two per cent – roughly in line with GDP.
Despite the generally positive longer-term picture, Australia’s car dealers have experienced 24 consecutive months of new car sale volume declines thanks to house price falls and tighter funding conditions from lenders following the Royal Commission. And then COVID-19 reached our shores, resulting in significant sales declines in April.
Since April, however, volumes have begun to return and buyers have been encouraged by the discounts dealers are offering to move inventory. As an aside, some of those discounts have been extreme with dealers selling vehicles at below cost.
At the time of writing it is estimated that sales volumes are between 40 per cent and 65 per cent of pre COVID-19 levels, which it must be remembered had been declining for two years.
It is widely accepted that consumer sentiment and house prices provide the greatest influence in the decision to buy a new vehicle, but with GDP and consumer sentiment expected to be sharply negative this year, it turns to house prices to provide the industry with a clue about the prospects for new car sales.
House prices are expected to decline between five and ten per cent this year, which suggests the outlook for new car sales may not improve in the short term, particularly as much of the weakness in house prices is expected to follow the ending of mortgage repayment deferrals currently being offered by the banks.
Consumer sentiment may also be impacted adversely as JobKeeper payments are wound back, roughly the same time mortgage holidays end.
Amid the challenges prior to COVID-19, Australia’s automotive sector had been ‘rightsizing’ for lower volumes in new car sales.
The used car market however is surprisingly strong. Secondhand car auctioneers have reported a much sharper bounce in prices that they were expecting and this is despite the ‘de-fleeting’ by the rental companies Thrifty, Avis and Hertz in response to the lack of international business travelers and holiday makers.
For dealers one shouldn’t expect the recovery in used car sales and prices to offset the combination of a decline in new car sales volumes and a slump in financing revenues.
With respect to financing revenues, Westpac is withdrawing its lines of credit and it will be very hard for a customer to gain approval through St George’s funding. While Original Equipment Manufacturers may step in to fill the gap, there has meanwhile been a jump in applicant rejection rates. The rejection rate is now estimated to be one-fifth of all applications, which is much higher than normal, and reflects much tighter lending conditions despite lower interest rates.
While car sales dropped 50 per cent in late March, servicing and parts, which represent the majority of dealer profits have returned to 70-80 per cent of where they were pre-pandemic.
Without financing profits, it is believed that dealership profits have only been positive thanks to the support of JobKeeper. The big question is what happens if and when Jobkeeper ends.
UBS Economists currently believe a revenue and volume cliff is coming and it coincides with the end of Jobkeeper, a reduction in JobSeeker and the end of tenant eviction and mortgage holidays. And while commuters are eschewing public transport due to COVID-19 fears, and consequently powering demand for used cars, dealers remain concerned that the rebound is a bubble caused by short-term stimulus measures.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
