Getting ready for the unemployment queue…

Getting ready for the unemployment queue…

A long time ago, back in a world of Australian made Ford Falcons and Holden Commodores, becoming a dealer principle was a ticket to riches.

For those not down with car trade lingo, dealer principle (DP) is the person who owns the car yard.

At any dealership, there was always the story of someone who worked their way ‘up’ to become a DP.

Car salesmen schlepped it out in the cold and windy car lot, trying to hawk the latest Calais or Fairlane, would look longingly.

From any point in most car lots, the dealer principles warm, cosy office would be in view.

You see back then, pretty much every family was either Holden or Ford — Aussies knew you were one or the other — and every car salesman believed in that dream.

The dream is, if you worked hard enough, sold enough cars and saved your bonus, you too could one day be the proud owner of a car dealership.

At least, that was the dream…

Nowadays, car salesmen will be lucky to keep their jobs at all…

From bashed up clanger to the latest model

Like many readers, most of us come from a time when pretty much every family owned a car in ‘sort of’ working order.

My dad’s love for Valiant’s meant that wherever we went, we left several clouds of leaded smoke behind us. Then one day the Val’s reverse gear died. That didn’t stop my old man. He would only park in spots he could roll out of…

It was only after years of my sister and I turning blue in the back, that my mum insisted we get something more sensible.

Dad sold his Valiant VIP (with a vinyl roof!) for the ugliest cream coloured Ford Falcon XE you have ever seen.

He bought it because it worked — including reverse. And just like that we officially became a ‘Ford’ family.

The thing is, we were just like every other family at the time.

Double digit interest rates had crippled many people financially. Australia was on the cusp of a recession.

More to point, people didn’t take a loan out for cars back then.

Everyone drove some sort of clanger, because you paid cash for a car.

Three decades later and things are very different.

The clangers are gone. Most families have a car less than five years old.

Carsguide says that in the last seven years, more than 7.36 million NEW cars have been bought. That’s equal to roughly 30% of the Australian population. And that figure doesn’t include used cars…

How did this surge in new car ownership jump?

Sometime around the late 1990s — when the Aussie credit market was deregulated further — loans for pretty much anything became a lot easier.

And, more importantly, increasing your debt levels became more normal.

You see this surge in new car growth at the end of the 20th Century…

Australian new car sales – 1994–2019

Source: Federal Chamber of Automotive Sales; Trading Economics

The rise in new car sales had nothing to do with a sudden change in fortunes.

While the early 90s was a very good time for Australians, it was easier access to credit that drove the increase in new car sales.

That doesn’t mean personal loans either.

The change in mortgage lending meant that people could take out a cash advance against their home — bankers call it ‘withdrawing’ against the equity — and use that to buy a car.

Source: CoreLogic RP Data; VFACTS; Macquarie Macro Strategy; Business Insider Australia

For three decades there has been a direct correlation between the number of new vehicles sold and Australia’s house prices…

This is what happens when you turn your mortgage into an ATM.

Furthermore, this wealth effect made owning a car dealership a gold mine. House prices going up meant more people were most likely to trade in their five year ‘old’ car for the latest model.

Those days are over though.

Property values are falling.

Banks are reducing what they are willing to lend.

The easy access to credit is wanning.

As a result…fewer Australians feel they can buy new cars.

No one wants to get a licence

Aussie new car sales are rapidly falling.

New car sales for the month of January 2019 were down 7.4% compared to January 2018.

Sure, January is always a slow month for car sales. But 7.4% is a massive decline.

Right now, Aussie new car sales are facing an economic slump.

However, what if the Aussie new car sales never recover?

What if the industry’s current economic slump morphs into a structural decline?

The two are very different you see.

An economic slump is generally a temporary effect. It happens in economies. And most businesses prepare themselves to ride it out.

But a structural slump is completely different.

A structural decline is something an industry can’t escape.

While the Aussie new car trade is being hit with a slowing economy, our new car sales may continue to plummet into the next decade — regardless of what house prices do.

You see the overall car buying trend has shifted.

The bigger trend unfolding will ultimately cripple cars AND the vehicle manufacturing industry.

Why?

Fewer and fewer kids are learning how to drive.

In 2015, the ABC reported that licencing rates for people under 25 have dropped 77% to 66% since 2001.

Which mirrors what’s happening around the world.

In 1983, 92% of US teenagers had a driver’s licence. By 2014 that had dropped to 77%.

Same goes with the UK.

They also have seen a 20% drop in the amount of people under 25 learning to drive.

Difficultly and a general lack of interest is the reason why many kids aren’t interested in learning how to drive.

Plus the privilege of solo wheels is incredibly expensive.  

Petrol is increasing. Insurance costs leap frog each year. Congestion in major cities is increasing.

Then there’s financial responsibility that goes with keeping a car running. Tyres, windscreens and the whole moving parts of the engine to keep the damn thing running.

Then you have to park the dang thing…and hope you don’t get fined by the local council over something minor.

Ride sharing services are becoming the much more attractive options anyway.

So, if it doesn’t make financial sense to own a car…why bother with the expense of getting a licence then?

We’ve hit peak car

You’ve heard of peak oil.

Now it’s time to face peak car.

Peak car is the idea that from here on in, car sales will reduce.

Less and less people are learning to drive, which in turn means less and less demand for car ownership.

This is a trend that car manufactures picked up on a couple of years before the rest of us.

Last year, Toyota invested US$1 billion in Uber in Asia.

But before that, Volkswagen bought a stake in ride sharing service Gett.

But BMW beat both of them to it by throwing some money into the carpool app Scoop.

Rounding out this list is General Motors (GM). Around the same time in 2016, GM expanded into another ride sharing service — Lyft.

Daimler Chrysler – the company that made those noisy V8 engines in my old man’s beloved Valiant, invested in CleverShuttle in Germany.

Worldwide is a slow structural shift happening towards car ownership.

And this is one of those rare times, where big business picked up on the trend early on.

It’s not just Australia’s economic slump that is stopping us from buying new cars.

However, the car industry is now facing a long-term structural decline in car sales.

Becoming a dealer principle, was once a one-way ticket to financial stability.

New car ownership is shrinking.

And car manufactures know that.

I wonder if the people selling you the car do.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

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