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Economics | March 9, 2020

The cars that hold their value the best… …luxury cars, and car affordability Economic perspectives

In this report we look at a number of aspects of the car market.

The CommSec luxury vehicle sales index has risen for the past eight months, matching the lift in national home prices. Sales of nine luxury marques in February 2020 were higher than in February 2019.

A CommSec analysis of 131 car models has found that, on average, new cars retain 70 per cent of their value over the three years after purchase. The Fiat 500 Lounge (1.2 litres, 5M, FWD, 3D) was found to retains its value the best.

The CommSec Car affordability measure shows that it takes a worker on average earnings just under 15 weeks (14.87 weeks) to buy a new Toyota Corolla, down from 15.5 weeks of wages just five years ago and 19 weeks of wages a decade ago.

New and used vehicles are components of household wealth. Further, changes in other assets like homes and shares can affect demand for cars.

What does it mean According to the latest motor vehicle census, there were

19.5 million registered vehicles in Australia as at January 2019. Over the year, the number of vehicles increased by 1.7 per cent, slightly faster than population growth. Some vehicles are owned by businesses. Others – somewhat temporarily – are owned by car hire companies. Others are owned by ordinary Australians.

While many households have at least one car parked in the driveway, it’s not uncommon to see at least two or three housed on the property. The family car is effectively that “other asset”. While not dominating the household balance sheet like homes or superannuation, it remains a ‘big ticket’ purchase.

A number of factors affect the car purchase decision. One is ‘wealth’. A Reserve Bank study “identifies a positive and stable relationship between household wealth and consumption, largely reflecting changes in spending on motor vehicles, durable goods and other discretionary spending.” Interest rates, the Australian dollar, vehicle pricing, warranty periods and availability of finance also affect vehicle pricing decisions.

When home prices were rising strongly from 2013-2017, sales of new vehicles were similarly rising. Australian home prices started easing in November 2017. Annual

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Economic Insights. The cars that hold their value the best… …luxury cars, and car affordability

new vehicle sales peaked in March 2018 and have been falling in the period since.

But luxury vehicle sales are rising. In fact the CommSec Luxury vehicle index has now risen for eight straight months, exactly matching the lift in home prices. The wealth effect of higher home prices, the cuts in interest rates and the rise in household asset values have allowed top-end buyers to update their rides. The hope is that the trend extends to the broader vehicle market.

At this stage many car buyers prefer to purchase quality used vehicles rather than new vehicles. Loans to buy cars in December were up 6 per cent on a year ago – the fastest gain in almost three years.

CommSec Luxury Vehicle index

To get a gauge on the luxury vehicle 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. And in the year to June 2019, rolling annual luxury vehicle sales were down 19.7 per cent on a year earlier, hitting 4-year lows.

But in July 2019, rolling annual sales lifted for the first time in two years. And the rolling annual measure has consistently risen in the seven months since (eight months total).

In February 2020 the annual total of luxury vehicle sales rose by 0.4 per cent to 88,855 vehicles. Sales are down 0.3 per cent on a year ago after being down 13.1 per cent in the year to June.

Annual sales of Lexus were at all-time highs in the year to February and sales of Rolls Royce were just shy of record highs. In February 2020, sales of Aston Martin, Audi, BMW, Ferrari, Lexus, Maserati, Mercedes Benz, Porsche and Rolls Royce were higher than the same month of 2019.

Luxury vehicle sales have now risen for eight straight months, matching the gains in home prices. The hope is that the strength at the top end of new vehicle and housing markets will extend to broader strength for new vehicle sales, home sales and home prices.

Used vehicle values

One factor that can cause people to purchase a used car or to hold onto their car for longer is resale values. Clearly a host of factors determine resale values, but simply it gets down to supply and demand. Factors influencing demand include reputation, whether the model is well priced, special features, warranty period, cost of servicing and parts. As well as potentially looking different (model styling), a 2020 model vehicle may also have different (better) standard inclusions than the same model that was sold as new three years earlier. How well resale values hold up may vary significantly from model to model.

It is relatively easy to assess resale values. In its Open Road magazine for members, NRMA provides “a comprehensive guide to new car prices, depreciation in used car values, and those all-important safety rankings”.

CommSec has assessed the data in the latest report, a report hat sources prices from Glass’s Guide for February 2020. We have compared the average used car price for a 2017 model to the latest ‘new’ car price (assuming this to be a 2020 model). NRMA indicates that the data on used car pricing represents the “average used car price for a vehicle or similar variant purchased from a licensed used car dealer excluding registration transfer fees, stamp duty, insurance or optional extras.”

While there are a number of ways to represent the data, we have expressed the ratio of the used car price to the new car price. The data can also be expressed showing the percentage decline (depreciation) of the new car price to arrive at the used car price.

Overall 131 vehicles have been assessed. In a number of cases, there were no prices of 2017 used car models, preventing an analysis of their resale values. A further 16 models can be assessed using 2018 used car values.

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Economic Insights. The cars that hold their value the best… …luxury cars, and car affordability

We defer to the experts in the vehicle industry to determine why a particular model retains its value best compared with other car models.

But according to the data the new car that held its value the best was the Fiat Lounge. The new car price (maker recommended retail price) was recorded as $19,250. And the price of a 2017 Fiat Lounge was recorded at $17,700. That means around 92 per cent of the new car price was retained three years later. Alternatively the vehicle only depreciated in value by around 8 per cent over the period.

Next highest was the Toyota Land Cruiser (90.7 per cent), Volvo XC90 (86.5 per cent) and Jaguar E-Pace (84.6 per cent). Both Porsche and Tesla had two models each in the top 10.

CommSec Vehicle Affordability measure

For around a decade CommSec has tracked new vehicle (car) affordability. To conduct the analysis data is obtained on car prices from NRMA and then compared with average weekly earnings. Over time we have used cars such as the Holden Commodore and Ford Falcon to track affordability. We will now track other vehicles such as the Toyota Corolla.

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 35 per cent over the past decade, ahead of a 23 per cent increase in consumer prices.

For the new vehicle market as a whole, it is clear that vehicle affordability has markedly improved over the decade. In fact, according to the CommSec Vehicle Affordability measure, vehicle affordability is just off the best levels ever recorded.

The NRMA still provides a new car price for the Holden Commodore (LT 2.0T 9A FWD sedan). According to the data it now takes a worker on average earnings just over 20 weeks (20.17 weeks) to buy a new Holden Commodore, down from 24 weeks of wages just five years ago and 32 weeks of wages a decade ago. According to this data, car affordability is the best on record.

If we track the Toyota Corolla (Ascent Sport 2.0L CVT FWD 5D) it takes a worker on average earnings just under 15 weeks (14.87 weeks) to buy a new Toyota Corolla, down from 15.5 weeks of wages just five years ago and 19 weeks of wages a decade ago. According to this data, car affordability is just off the best levels on record (14.02 weeks in June quarter 2018).

The lower Australian dollar has pushed up prices of overseas-sourced vehicles in the past two years although affordability is still close to the best on record.

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.

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.

Today it takes a worker on average earnings under 40 weeks to buy a new BMW 320i (Luxury T2.0L 8A RWD sedan). While around the same affordability as four years ago, and better than a decade ago (44 weeks) affordability is off the best ever levels of 35.21 weeks recorded in September quarter 2017.

What is the importance of the economic data?

The Federal Chamber of Automotive Industries releases regular data on new vehicle and motor cycle sales.

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Economic Insights. The cars that hold their value the best… …luxury cars, and car affordability

Cars and bikes are key purchases for consumers, farmers and businesses. CommSec tracks luxury vehicle sales on a monthly basis. Over past years there have been close links

between new vehicle sales and home prices and between luxury vehicle sales and the broader car market.

CommSec tracks car prices and wages on a regular basis. The data is useful in tracking car affordability. If cars are more affordable then consumers may be enticed to buy a new vehicle rather than used vehicle. And if fewer dollars are required to purchase a car, either consumers may move up market or use the savings to purchase other goods and services.

What are the implications for interest rates and investors? Luxury vehicle sales are recovering from recent lows. Sales of nine luxury vehicles in February 2020 were higher

than in February 2019. The top end of the housing market has lifted as shown by prices of established homes at auctions or private treaty sales.

Higher home prices lift asset values giving home owners and buyers greater scope to buy other assets like cars. Lower interest rates also make the purchasing decision more attractive.

While home prices continue to rise, share prices have eased from record levels, weighing on wealth levels. So the coronavirus outbreak may induce some caution by consumers in the short term from taking on major spending decisions.

So while recovery in the luxury car market tends to be followed by the broader vehicle market, the follow-through may take a little longer.

Over the last few years more car owners have opted to hold onto cars for longer. Lower home prices and higher car prices have influenced the buying decision. The extent to whether the vehicle has held its value over time may have also influenced the buying decision. It is notable that luxury cars have generally retained their value best and that may have influenced decisions to upgrade.

While interest rates are low, falling home prices before mid-2019 may have constrained finance availability for the purchase of new vehicles. Higher home prices across a raft of regions may ease finance constraints.

Craig James, Chief Economist, CommSec Twitter: @CommSec

On Page 5 we have provided the results of our analysis of new & used car prices.

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Economic Insights. The cars that hold their value the best… …luxury cars, and car affordability