[CommSec Research]Car affordability nears best level in 34 years;

dyno

Important Information

The summary and attached report has been prepared without taking account of the objectives, financial situation or needs of any particular individual. For this reason, any individual should, before acting on the information in this report, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice. In the case of certain securities Commonwealth Bank of Australia is or may be the only market maker.

Car affordability nears best level in 34 years;

Sales of 4WDs hit record highs

Car Affordability; New Car Sales

¾ Car affordability improved in the latest quarter and is not far off the best levels seen in 34 years. It now takes someone on the average wage the equivalent of 31.4 weeks of wages to buy a new Ford XT four-door auto sedan. Five years ago the same worker would have had to work an extra month to afford the same vehicle.

¾ Australian new car sales hit a 10-month high in March, rising by 3.4 per cent. Sales of sports utility vehicles (SUVs) or four-wheel drive vehicles soared by 7.8 per cent to record highs.

¾ Petrol sales hit a 3-year high of 4,904.7 megalitres in the December quarter 2010. Sales were up 1.9 per cent on a year ago – the strongest annual increase in 3½ years.

What does it all mean?

· The lift in car sales in March can best be described as encouraging. Sales had seemingly been going nowhere for the best part of a year, so the increase last month may show that car buyers are becoming more confident. No doubt the higher Aussie dollar and consumer conservatism are translating into some attractive deals, flushing out potential car buyers from the comfort of their homes.

· Car buyers certainly can’t complain that prices are too high. Car affordability has improved over the past six months and is now approaching the best levels seen in 34 years. Rising wages and the strong Aussie dollar should drive even better levels of car affordability over the remainder of 2011.

· Aussie consumers may complain about high utility fees or fruit and vegetable prices, but it is clear that there are plenty of savings on ‘big ticket’ items like cars to offset increases in daily living costs.

· Australians just love four-wheel drive vehicles with sales hitting record highs last month, once accounting for normal seasonal influences. One in every four vehicles sold in the month was a 4WD or sports utility vehicle. And sales of 4WDs also hit new highs over the past year. The only thing that will stem our love-affair with the 4WD is high fuel prices, and that factor will no doubt have a higher weighting in purchase decisions over 2011.

What do the figures show?

New car sales

· New car sales lifted to 10-month highs in March, rising by 3.4 per cent in seasonally adjusted terms. It was the biggest monthly gain in 11 months.

· Car sales had previously edged 0.2 per cent higher in March after falling by 2.2 per cent in February.

· Sales rose most in Northern Territory (up 9.9 per cent) followed by NSW and Queensland (both up 6.7 per cent), Western Australia (up 1.4 per cent) and Tasmania (up 1.0 per cent). Sales fell 2.9 per cent in South Australia, fell 0.9 per cent in the ACT and fell 0.2 per cent in Victoria.

· Passenger car sales rose by 1.3 per cent in the month, while sports utility vehicles soared by 7.8 per cent and “other” vehicles (trucks, utes etc) lifted by 4.3 per cent.

· Overall car sales are up 1.9 per cent on a year ago. But while passenger vehicle sales are down by 4.6 per cent, SUVs are up 13.5 per cent and “other vehicles” are up by 8.4 per cent.

· In rolling annual terms, 237,683 SUVs were sold in the 12 months to February – the highest reading on record.

New Car Affordability

· Based on the latest data on new car prices from NRMA & Glass’s Guide and latest wages data from the Bureau of Statistics it is possible to calculate data on car affordability.

· CommSec has calculated that it now takes someone on the average wage the equivalent of 31.4 weeks to earn enough to buy a new Ford XT four-door auto. Car affordability has improved over the past six months, falling from 32 weeks in September quarter 2010. And car affordability is not far off the best levels seen in 34 years – in the June quarter 2009 it took the average worker the equivalent of 30.7 weeks of wage to buy the same Ford sedan.

· Car affordability has consistently improved over the years. Just five years ago it would have required the average wage earner to work for 35 weeks to earn enough to buy the same Ford sedan – about an extra month more than today.

Petrol sales

· The Bureau of Infrastructure, Transport and Regional Economics has reported that petrol sales totalled 4,904.7 megalitres in the December quarter 2010. It was the highest quarterly result in three years. Sales were up 1.9 per cent on a year ago. Sales of E10 and proprietary brand fuel hit record highs in the quarter.

What is the importance of the economic data?

· The Australian Bureau of Statistics (ABS) provides monthly estimates of car sales in seasonally adjusted and trend terms after receiving the actual sales data from the car industry. The figures highlight the strength of consumer spending as well as conditions facing auto & components companies.

What are the implications for interest rates and investors?

· We can’t read too much into the lift in car sales in March. While encouraging, a drop in April sales will bring us back to square one.

· The improvement in car affordability is just another of the good “fundamentals’ for Aussie consumers. While consumers are choosing not to spend, a strong job market, rising wages, discounting by retailers and the strong Aussie dollar are all pointing to latent spending power.

· Petrol sales may have been up late last year but it is likely that they have dropped back in the first few months of 2011 in response to higher prices. The rising cost of petrol is one of the key ‘hot button’ factors for consumers, trimming spending capacity.