Share on twitter Patrick Commins by The bottom dropping out of the market for new cars is an early and worrying sign that falling house prices are starting to have an impact on Australians' spending decisions. Aussie car sales fell 7.8 per cent in July versus the same month in 2017, data from the motor industry's statistical service, VFACTS, showed. That was the worst monthly performance since June 2011. The decline in sales has accelerated in recent months, tracking with the deteriorating property markets in Sydney and Melbourne. The monthly car sales figures, against the corresponding month in previous year, turned negative in April at 0.2 per cent, before recording falls of 2.1 per cent in May and 2.9 per cent in June. Then came July's plunge. New car sales are particularly responsive to rising and falling house prices. A research paper by the Reserve Bank of Australia in 2015 found that a 1 per cent increase in property prices tended to lift new car purchases by 0.5 per cent, against a broader lift in overall consumption of only 0.25 per cent.

Are plunging new car sales an early warning sign for consumption more broadly? Nic Walker

(The paper remains frustratingly quiet on the "why", but one suspects that in the process of refinancing or selling and buying a new house, Aussies have been using the increase in equity to fund a nice new car.) Advertisement

In May, UBS experts analysed the relationship between house prices and car sales and found them even more strongly linked. They estimate that over a two-year period, for every 10 per cent fall in house prices, accompanied by a "moderate shock" to consumer sentiment, total new car sales would drop by a similar margin. New prestige and luxury car sales would suffer a fall of 8 per cent. "We believe house price falls are starting to affect new car sales and forecast the impact to last for an extended period," the analysts, led by Jordan Rogers, warned clients on Friday following the release of the VFACTS data. Canary in the coal mine Their earlier work prompted the broker to downgrade their earnings estimates for listed luxury car dealer group Autosports Group and downgrade their call on the stock to "neutral" from "buy". Fellow listed car dealer group Automotive Holdings, which reports annual figures on August 27, also copped an earnings downgrade, but held on to its "neutral" recommendation.

This has the hallmarks of the "wealth effect" in action: as people feel richer they tend to feel more comfortable spending. But the opposite is also true. RBA policy makers often repeat their mantra that their policy measures are not aimed at house prices. But they do fret over the knock-on effect to consumption from a deteriorating property market and to what degree that translates into more subdued economic activity more broadly. CBA chief economist Michael Blythe agreed that the recent decline in property prices "could be" a part of the sharp drop-off in new car sales. But if so, Australians are showing a much greater sensitivity to house prices on the way down than they did when the property market boom was in full swing. Over the past three or four years, the value of the country's housing stock jumped by $US1.5 trillion ($2 trillion). Blythe points to research suggesting consumption can lift by 4 cents for every extra dollar of wealth. But if that were the case "we should have had a massive consumer boom over the past few years", which is demonstrably not the case. It may well be that "consumers are less responsive to positive economic news but maybe more reactive to negative economic news", he notes.