- Commsec chief economist Craig James says luxury car sales predominantly act as a leading indicator for Australian home prices.
- Luxury car sales peaked in 2016, and both car sales and home prices are falling simultaneously for the first time in six and a half years.
- James said other areas of the economy can still benefit in such a scenario, but it’s currently unclear where the next catalyst for demand is coming from.
As has been well-documented this year, Australian house prices are in decline.
And according to Commsec chief economist Craig James, volumes of luxury car sales often act as a pretty good guide about the direction of home prices.
“When luxury car sales are in retreat you can bet that home prices aren’t far behind,” James said in a Commsec research note this morning. “That has been the case since the early 1990s. And indeed that’s the case now.”
As one of its consumer trend monitors, Commsec maintains a luxury car index which is derived from sales data of 17 luxury brands, including BMW, Ferrari, Mercedes Benz and Porsche.
“Quite remarkably, sales of luxury vehicles have tracked movements in home prices over time,” James said.
The chart below tracks monthly changes in house prices against Commsec’s luxury car index. And it shows that since January 2016, the correlation has been pretty strong:
More broadly, there was a sharp decline in domestic car sales last month as home prices had their biggest monthly fall in seven years.
And looking at recent history, James noted luxury car sales peaked in calendar-year 2016, and have since declined by around 11%.
At the same time, “monthly growth of national home prices started to slow in November 2016”, James said.
“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.”
Since then, Sydney homes prices have fallen by 5.5% in annual terms.
James also noted that a similar dynamic also played out in the aftermath of the global financial crisis in 2008.
“The slowdown in the luxury car market in 2008 coincided with a peak in the housing market, providing validation for the start of the slowdown,” James said.
“And the annual decline of home prices bottomed out in early 2009, again in line with that of luxury car sales and ahead of the broader car market.”
Ultimately, going back to the mid-1990s, this chart shows that house prices and luxury car sales have tracked a similar path:
And now, for the first time in six and a half years, home prices and luxury car sales are falling at the same time.
So what does it all mean for markets more broadly?
James said that for both new car sales and home prices, the top end of the market is leading the slowdown. And that’s “not necessarily a negative”, James said.
With both markets now in consolidation mode, he said consumers may pay more attention to other areas. For example, when luxury car sales flattened out in 2004 and 2005, more Australians travelled overseas.
He added that spending in traditional retail outlets may also benefit if consumers switch their focus away from high-end purchases.
However, the catalysts for luxury car sales and home prices to reverse their current trajectory in 2019 have not yet become apparent.
“The Aussie dollar is marking time along with interest rates,” James said.
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