Interest rate rise applies the brakes on new-car sales in Australia

The Reserve Bank’s recent interest rate rise of 0.5 per cent is already being felt in new-car showrooms across Australia.

While it was the single biggest rate interest rise in 22 years, the new official cash rate of 0.85 per cent is still among the lowest on record. 

However, the move has already applied the brakes on up to 10 per cent of finance applications at new-car showrooms in low- to middle-income areas across Australia.

And the interest rate shock appears to have dented new-car sales enquiries, with dealers reporting lower foot traffic in June – historically the busiest month of the year – than in May.

In one example at a dealership canvassed by Drive, six out of the 50 finance applications for a popular model priced below $40,000 were knocked back following the interest rate rise, because it pushed some borrowers over the threshold to be able to comfortably afford the repayments.

Data from accounting firm Deloitte shows almost one-third of all new cars sold across Australia are bought using in-dealer finance. However, some dealers say up to 50 per cent of their sales are done via their finance desk.

The interest rate rise of 0.5 per cent announced by the Reserve Bank in the first week of June 2022 – to 0.85 per cent – was higher than financial analysts had forecast.

They had been predicting an interest rate rise of between 0.25 and 0.4 per cent.

The 0.5 per cent interest rate rise appears to have spooked lenders, who are now bracing for further increases.

The other rising costs in the new-car sales process are dealer “floor plan” interest rates.

Most showrooms finance their vehicle inventory once they place an order with the car manufacturer. In essence, it is a bridging loan – or fee – to cover the dealer’s cost of a new car before it is sold to a customer.

Although wholesale finance rates paid by dealers for their showroom stock are generally lower than retail interest rates, a number of dealers canvassed by Drive said their “floor plan” costs had increased in the past fortnight, since the Reserve Bank interest rate rise.

Industry insiders are increasingly of the view that the current period of record dealer profits and limited vehicle availability may soon come to an end.

The general consensus among major multi-franchise new-car dealer networks canvassed by Drive is that in the next 12 to 18 months, they expect there will be a slowdown in demand – just as car factories finally catch up with supply shortages.

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

“The car factories will finally catch up, and demand will come off the boil as some buyers are put off by rising interest rates or other economic uncertainty. So we will probably end up with a dip in demand just as a tonne of new cars start heading our way.

“Plus we expect as interest rates rise, more lenders will start to knock back more finance applications because the higher interest rates will stretch people’s ability to service a loan.”

A specialist for automotive analyst Deloitte said although the accounting firm monitors in-dealer finance, it does not know how much finance is secured outside dealerships – or what proportion of buyers pay for new cars with their savings.

Deloitte also says it does not know how many deals “fall over” based on lending criteria.

However, anecdotally, up to 10 per cent of in-dealer finance applications since the interest rate rise have been declined, according to a number of dealers canvassed by Drive.

While most new-car showrooms have waiting times 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 rises, new-car RRPs may eventually come back down – to offset the cost to consumers amid imminent interest rate rises.

Industry experts say if buyers are looking for a bargain – and can afford to wait – buying conditions should be better in a year or so from now.