Crunch Time

The Age

Saturday October 25, 2008

Richard Blackburn

If ever there was a time to buy a new car, this is probably it, writes Richard Blackburn.

IT MAY sound like a hackneyed marketing phrase but there's never been a better time to buy a new car.

After Australians bought record numbers of new cars in the first six months of this year, the market has hit the wall as high interest rates, fuel prices and growing economic uncertainty take their toll.

The sudden downturn in demand has left dealerships around the country with a king-sized hangover: how to shift mounting stocks of cars ordered during the boom times.

With imported cars typically taking anywhere between one and three months to arrive from overseas, car makers are being inundated with product they no longer need.

One unnamed senior manager who runs a number of new-car dealerships says manufacturers are placing pressure on dealers to take excess stock off their hands by offering attractive cash incentives, particularly for four-wheel-drives and large V8s, which are proving hard to shift.

"The market has definitely gone off the boil and the manufacturers are starting to throw incentives at dealers in different forms," he says.

"The situation is likely to get worse in the next few months because everyone has too much stock. Dealers are starting to sell down enormous amounts of stock, but they ordered these cars two or three months ago and they've just kept coming," he says.

"They've had to gut the price of some cars because the floor plan (the rent that dealers pay to car makers for having models on their lot) is killing them," he says.

He doesn't see a quick fix to the problem, despite car makers winding back their orders.

"It's going to be a buyers' market for at least the next six months. Australia's not in as bad shape as the US, but there's going to be a glut of cars for while," he says.

Rather than cut the advertised retail price of their cars, some car makers give dealers cash incentives, which are indirectly passed on to customers as discounts, extra equipment, free services or extended warranties.

Dealers are also offering low-finance loans on vehicles to get the less-popular cars and demonstrator models off their lots.

The situation is likely to get more desperate as dealers try to offload their '08-plated stock, which instantly becomes less valuable once January 1, 2009 arrives and they become last year's model.

Sydney docks are reportedly so full of cars that some ships are being forced to wait offshore until cars can be cleared from the wharves.

One senior wharf employee at Sydney's main container terminal says staff are having to move cars off-site to fit them in.

Usually dealers are the first to panic when the market turns down but manufacturers are driving most of the discounting.

Struggling local car maker Ford has taken the unprecedented step of offering its national fleet pricing to all its customers.

Fleet pricing, which on a Falcon XT is roughly $4500 cheaper than the retail price, is usually only offered to customers who buy in bulk.

Chrysler is offering a deal, asking for half of the purchase price up-front and a lump sum after two years.

Mini is throwing in three years or 50,000-kilometre free service to try and sweeten the deal for reluctant buyers.

Last weekend, Suzuki held a sales event with drive-away pricing on most models, an extended five-year warranty and extra equipment - including satellite navigation on their larger models.

Mitsubishi meanwhile is offering a $2008 factory cashback incentive on its entire range for October, while Subaru has drive-away pricing on selected models, which cuts roughly $3500 from a Liberty mid-sized sedan and wagon.

Market leader Toyota is also feeling the pinch and is offering drive-away pricing on most of its cars. A notable exception is the tiny Yaris, which competes in the relatively healthy city car segment of the market.

Premium brands are also discounting, with Citroen offering $7500 off the price of a C4 hatch with leather trim, Fiat cutting the price of its Ritmo small car by $4750 and Alfa Romeo offering drive-away pricing on its entire range, with savings stretching to more than $5000.

Lexus has drive-away pricing for its IS250, which represents a saving of almost $5000. The Japanese maker is also offering a special run-out deal just shy of $10,000 off its RX350 off-roader, despite the new RX350 not being due until next year.

Most of the deals only last for October but they are unlikely to be the last discounts of 2008.

Car-makers in the upper end of the luxury market have been hardest hit of all brands, suffering more than most from the stockmarket crash, while also being hit by the increase in the luxury car tax from 25% to 33%.

The tax hike alone has added more than $11,000 to the price of an Aston Martin V8 Vantage.

On top of that, finance for luxury cars is drying up. GE Finance this week announced it would no longer lend more than $100,000 for car purchases.

Official figures show that sales of luxury four-wheel-drives dropped by close to 25% last month, following similar falls in August and July.

The Federal Chamber of Automotive Industries says luxury car sales are down 12.5% in the three months since the Government introduced the hike in luxury car tax.

The news isn't any better for local car makers, with sales of locally built cars, which include the Ford Falcon and Territory, the Holden Commodore and the Toyota Aurion and Camry, dropping by 14% so far this year.

Sales of mid-sized four-wheel-drives also dropped 12% last year.

Dealer margins are being further squeezed by the shift in buyer preferences from large to small cars, which generate far less profit.

"We're still selling a lot of cars, but they're all small cars and there's bugger-all margin in them," a senior executive says.

The FCAI is still forecasting a new car market of more than 1 million sales, although chief executive Andrew McKellar is unwilling to make a forecast for 2009.

"There are only two months to go till the end of the year and it is still likely that we will exceed 1 million sales. As for next year, we are still looking at the market and won't be making a forecast until closer to the end of the year," he says.

He says the recent interest rate cut should stimulate buyer demand, but says there is a strong case for further Government and Reserve Bank action to restore consumer confidence.

"I think there are going to be some good bargains out there and the reduction in interest rates will definitely increase people's ability to fund new vehicle purchases. There's every reason for people to be still looking at their options," he says.

It's not all good news for car buyers, though.

Falling resale values of used cars mean that any savings made on a new car purchase could be lost in a lower trade-in price.

Resale values of used cars tumbled in the first half of the year as high interest rates and high petrol prices damped demand.

Philip Brown, sales director for Manheim-Fowles auction group, says sales of used large cars dropped by up to 20% between the start of the year and August.

He says a two-year-old large car with roughly 40,000 kilometres on the clock was selling for $20,000 in April but by August, some were selling for as low as $16,000.

"There's no doubt that from April to August prices took a real hammering," he says.

He blames fuel prices, interest rates and strong sales of new cars at discounted prices for the decline.

A 15% increase in vehicle repossessions had also increased supply and put pressure on prices.

"There are lots of cars selling and the prices are much lower than they were earlier in the year," he says.

"There's plenty of good buying at auction at the moment," he says.

But he says prices have improved in the past four to six weeks, largely as a result of recent interest rate cuts.

Chris d'Souza from used car valuation experts Glass's Guide agrees.

He says used car values have strengthened as money-conscious buyers move away from new cars to the second-hand market.

He claims used-car values traditionally improve when there is an economic downturn.

"There's a pendulum effect. When new car sales are booming, used-car values tend to fall, but as new-car sales drop, near-new used-car prices improve," he says.

He says used-car values have "taken a hiding" over the past 12 to 18 months, which means the gap between the price of a new car and a near-new car has widened considerably, making used cars more attractive to buyers.

"We have noticed that used-car values have strengthened a little in the past six weeks or so," he says.

It's not all good news for consumers, though.

The current global credit squeeze means that finance companies are under pressure and are tightening their lending criteria accordingly. About 35% of new car purchases are funded by dealership credit, but buyers are likely to find it harder to secure finance.

"Liquidity still remains pretty tight," McKellar says.

Dealers are also looking for new ways to improve their margins, which means they are keen to push finance and insurance deals, as well as after-market accessories and extended warranties.

Some finance deals can appear attractive on the surface, but the payment plan is often based on the full retail price of the car, which means the interest payment savings are offset by a higher initial purchase price.

While extended factory warranties are generally good value, dealer extended warranties don't come cheap. They can cost up to $1200 to add a three-year/60,000-kilometre coverage to the end of the free, factory three-year/100,000-kilometre warranty.

The problem is in the fine print. Many of these extended warranties come with strict requirements, such as having the car serviced at that specific dealership at given intervals, and don't cover big ticket repairs. Many aren't transferable when the car is sold. Some extended warranties do not provide value for money.

Despite the abundance of good deals available, the basic rules of common-sense buying still apply: shop around and compare offers from rival dealers.

Chances are they will be more willing than ever to sharpen their pencils.

© 2008 The Age

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