Rising interest rates dampen new car sales in Australia

The Reserve Bank’s interest rate may have only increased by 0.5%, but it has already eliminated up to 10% of requests for financing in some new car showrooms – and has triggered a drop in sales inquiries.

The Reserve Bank’s recent interest rate hike of 0.5% is already being felt in new car showrooms across Australia.

Although this is the biggest interest rate hike in 22 years, the new official cash rate of 0.85% is still among the lowest on record.

However, the move has already curbed up to 10% of finance applications at new car showrooms in low-middle income areas across Australia.

And the interest rate shock appears to have rattled new car sales inquiries, with dealers reporting lower foot traffic in June – historically the busiest month of the year – than in may.

In an example at a dealer requested by Conductsix of 50 financing requests for a popular model priced below $40,000 were turned down as interest rates rose as it pushed some borrowers above the threshold to afford repayments comfortably.

Data from accountancy firm Deloitte shows that nearly a third of all new cars sold in Australia are purchased with dealer financing. However, some dealerships claim that up to 50% of their sales are made through their finance office.

The 0.5% interest rate hike announced by the Reserve Bank in the first week of June 2022 – to 0.85% – was above financial analysts’ forecasts.

They had predicted an increase in interest rates of between 0.25 and 0.4%.

The 0.5% rise in interest rates seems to have spooked lenders, who are now preparing for further hikes.

The other rising costs in the process of selling new cars are dealer interest rates.

Most showrooms finance their vehicle inventory once they place an order with the automaker. Essentially, it’s a bridging loan — or fee — to cover the cost of a new car to the dealership before it’s sold to a customer.

Although the wholesale finance rates paid by dealers for their showroom inventory are generally lower than retail interest rates, a number of dealers interviewed by Conduct said the costs of their ‘floor plan’ had risen in the past fortnight since the Reserve Bank’s interest rate hike.

Industry insiders are increasingly of the view that the current period of record dealer profits and limited vehicle availability may soon be coming to an end.

The general consensus of the large multi-franchise networks of new vehicle dealerships approached by Conduct is that over the next 12 to 18 months, they expect demand to slow – just as auto factories finally catch up with supply shortages.

“It will be perfect buying conditions in about 12 to 18 months, based on our current estimates, but not so good for dealers,” said a veteran showroom owner.

“Auto factories will finally catch up and demand will falter as some buyers are discouraged by rising interest rates or other economic uncertainties. So we’re likely to end up with a drop in demand right at the when a ton of new cars will start arriving.

“Furthermore, we expect that as interest rates rise, more lenders will begin to reject more requests for financing, as higher interest rates will extend people’s ability to repay a loan. .”

A specialist at car analyst Deloitte said while the accountancy firm monitors dealership finances, it doesn’t know how much finance is being secured outside of dealerships – or what proportion of buyers are paying for new cars with their savings .

Deloitte also says it doesn’t know how many deals “fail” based on lending criteria.

However, anecdotally, up to 10% of dealer financing requests since the interest rate hike have been turned down, according to a number of dealers interviewed by Conduct.

While most new car showrooms have wait times of three to 12 months for most models, supply should improve by this time next year.

At the same time, after more than two years of steady price increases, the RRPs for new cars could eventually come back down – to offset the cost to consumers amid impending interest rate hikes.

Industry experts say that if buyers are looking for a bargain – and can afford to wait – buying conditions should be better in about a year.

Joshua Dowling has been a motoring journalist for over 20 years, spending most of his time working for the Sydney Morning Herald (as motoring editor and an early member of the Drive team) and News Corp Australia. He joined CarAdvice/Drive in late 2018 and was a World Car of the Year judge for 10 years.

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