Rising interest rates are halting new car sales in Australia

The Reserve Bank’s interest rate may have increased by only half a percent, but it has already destroyed up to 10 percent of funding applications in some new car dealerships – and has caused a drop in sales inquiries.

The recent increase in the Reserve Bank’s interest rate by 0.5% is already being felt in new car showrooms in Australia.

Although this was the largest rate hike in 22 years, the new official interest rate of 0.85% is still among the lowest in history.

However, this move has already delayed up to 10% of applications for funding in new car showrooms in low- to middle-income areas in Australia.

And the interest rate shock seems to have disrupted demand for new car sales, with dealers reporting lower traffic in June – historically the busiest month of the year – than in May.

In one example in a representation considered by KaraiSix of the 50 applications for funding for a popular model priced below $ 40,000 were rejected after the interest rate rise, as it pushed some borrowers above the threshold to be able to conveniently afford the payments.

Data from the accounting firm Deloitte show that almost a third of all new cars sold in Australia are purchased with dealer funding. However, some dealers say that up to 50% of their sales are made through their financial office.

The increase in the interest rate of 0.5 percent, announced by the Reserve Bank in the first week of June 2022 – to 0.85 percent – was higher than the forecast of financial analysts.

They predicted an increase in the interest rate between 0.25 and 0.4 percent.

The 0.5 per cent increase in interest rates seems to have frightened creditors, who are now preparing for further increases.

The other rising costs in the process of selling new cars are the interest rates on the dealer’s “floor plan”.

Most showrooms fund their vehicle inventory after placing an order with the car manufacturer. In essence, this is a transitional loan – or fee – to cover the dealer’s price for a new car before it is sold to a customer.

Although the wholesale interest rates paid by dealers for their stock in the showroom are usually lower than the retail interest rates, a number of retailers checked by Karai they said their “floor plan” spending had risen in the past two weeks after the Reserve Bank’s interest rates rose.

Industry insiders increasingly believe that the current period of profits for record dealers and limited vehicle availability may soon be over.

The general consensus between the large multi-franchise networks of new car dealers studied by Karai is that over the next 12 to 18 months, they expect a slowdown in demand – just when car factories finally catch up.

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

“Car factories will finally catch up and demand will boil over as some buyers are repulsed by rising interest rates or other economic uncertainty. So we will probably end up with a drop in demand just as a ton of new cars are starting to hit us.

“Furthermore, we expect that with rising interest rates, more and more lenders will start rejecting more funding applications, because higher interest rates will increase people’s ability to repay a loan.”

Deloitte, an automotive analyst, said that although the accounting firm monitors dealer funding, it does not know how much funding is provided outside of dealers – or how much buyers pay for new cars with their savings.

Deloitte also says it does not know how many deals “fail” based on credit criteria.

However, anecdotally, up to 10% of applications for financing in dealers after the increase in interest rates were reduced, according to a number of dealers surveyed by Karai.

While most new car showrooms have a waiting period of three to 12 months for most models, supply is expected to improve by this time next year.

At the same time, after more than two years of steady price increases, the RRP for new cars may eventually return – to offset costs for consumers amid an impending rise in interest rates.

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 car journalist for more than 20 years, spending most of that time working for The Sydney Morning Herald (as a car editor and one of the first members of the Drive team) and News Corp Australia. He joined CarAdvice / Drive at the end of 2018 and has been World Car of the Year judge for 10 years.

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