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Jordan Rogers

FALLING house prices will trigger drops in new-car sales that will particularly affect mid-price brands such as Ford and Holden as disposable income tightens, according to a new report from UBS, but the prestige market may be less affected.

The sober outlook from UBS Global Research in Australia says negative house prices across Australia – but specifically New South Wales and Victoria – will cut earnings per share by listed car companies Automotive Holdings Group Ltd (AHG) by 12 per cent, and prestige car retailer Autosports Group Ltd (ASG) by 21 per cent.

Analyst Jordan Rogers from UBS in Sydney told GoAutoNews Premium that falls of up to 10 per cent in house prices “would see total new-car sales drop by around 10 per cent and new prestige and luxury cars fall by about eight per cent over a two-year period”.

In his report, Mr Rogers said: “We expect AHG/ASG to outperform industry volumes but that the estimated margins for the 2019 financial year will be below those of the 2018 financial year as a result of aggressive competition.”

The report said that between 2000 and 2017, Australian vehicle sales grew at 2.5 per cent compound annual growth (CAGR), while the prestige and luxury-car sales grew at 6.6 per cent. In the same period, prestige and luxury-car sales as a portion of total car sales almost doubled from 18 per cent in 2000 to 35 per cent in 2017.

“The long-term increase in car sales in general is influenced by several factors including the decrease in the real cost of motor vehicles; strong growth in house prices; and the rise in household income,” Mr Rogers said.


He reported that in the period 1997-2017:

  • The real cost of motor vehicles has declined 22 per cent;
  • House prices have risen at 6.6 per cent CAGR; and,
  • Gross disposable income has grown at 5.8 per cent CAGR.

“We estimate that for every 10 per cent fall in house prices – including a moderate shock to consumer sentiment – total new-car sales would drop by around 10 per cent and new prestige and luxury cars would fall by around eight per cent over a two-year period,” he said.

“But house price falls today could impact new-car volumes in the 2020 financial year estimates because of lag effects.

“The model suggests that prestige and luxury-car sales are less impacted by a fall in house prices than total car sales.

“This is seen to be based on the consumer trend towards luxury and prestige cars; and the fact that car buyers who have more secure access to credit are less subjected to small fluctuations in the economy than lower-income households.

“However, our modelling indicates that premium-car sales have a stronger tendency to persist on their current growth trajectory.

“Should house price falls become sustained, the recovery in prestige/luxury sales may be slower.”

The data has led to UBS advising its share market clients to take a “neutral” view on increasing share holdings in both AHG and ASG.

Mr Rogers said that AHG has a weighting to “underperforming Ford and Holden brands” and he estimates that many Holden dealerships are now trading at a loss as the brand adjusts its business model to become a vehicle importer.

“Over the long-term, AHG and ASG could face new-car sales headwinds from ride-sharing and eventually robotaxis (autonomous vehicles), with UBS forecasting global new-car volumes to fall from 2027,” the report said.

“Following the change in view on house prices from UBS Economics, we have cut our underlying sales volumes for FY19E to zero per cent for ASG (from +1.5 per cent) and minus one per cent for AHG (from +1.0 per cent), and cut margins to below the estimates for this financial year.

“We have also reduced the level of annual acquisitions in forecasts to $125 million revenues for AHG and $100 million revenues for ASG.

“There remains a risk that sales volumes are worse than this should house prices fall by more than our five per cent base case, although we have attempted to reflect these risks in our margin profile, as we expect the leading dealers to outperform on volumes but to have to compete aggressively.

“In the meantime, we continue to see industry consolidation opportunities for major auto dealers over the next decade.”

By Neil Dowling

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