The vehicle retail industry is unlikely to escape the impact of rising mortgage rates, a result of moves to slow New Zealand’s busy economy and resulting inflation.
But it could also provide opportunities for dealers to increase their share of the finance market according to some experts, adding a positive flip side to otherwise negative news.
Currently, New Zealand’s inflation rate – a measure of the rise in cost of goods – is sitting at a 30-year high of 6.9%, off the back of high consumer demand, rising supply chain costs, and peaking property values.
ASB chief economist Nick Tuffley says a rise in the Official Cash Rate (OCR), one of the Reserve Bank’s key tools for controlling inflation, is set to come soon.
Raising the OCR triggers banks to restrict the amount of money they can lend, via higher interest rates. This has a dampening effect on spending. “We expect the Reserve Bank to eventually lift the official cash rate to 3.25%,” Tuffley says.
“That will roughly take mortgage rates to a range around 6% to 6.75% for potentially a couple of years until the Reserve Bank starts returning the OCR to something more ‘neutral’ around 2%.”
He says a rise in consumer finance rates is likely but will be smaller.
“Overall, that would be roughly a three to 3.5 percentage point lift,” Tuffley says.
“There is likely to be some impact on consumer rates, though proportionately the change would be much smaller.”
Then why do rising mortgage rates impact the car industry? Many cash buyers borrow through a home-backed mortgage facility and will be more hesitant to do so.
“In general, we expect consumer spending growth will slow this year as rising mortgage rates and the sharp jump in inflation crimp spending on more discretionary items,” Tuffley says.
“That will include car sales, which have had a very strong run since the pandemic started as people have focused on spending money domestically (rather than overseas travel) and while interest rates have been very low.
“The ability to borrow against houses via a mortgage to buy a car will increasingly get impacted by higher interest rates.
“And the new Credit Contracts and Consumer Finance Act has been more prescriptive in how banks and finance companies are required to assess new loans.
“Within the car sector there are likely to be shifts. High fuel prices will steer people to EVs, hybrids and small vehicles, which the Government’s feebate scheme is also incentivising.”
UDC national distribution manager Gray Lynskey says dealership finance is generally resilient to such market changes.
“Dealership finance has always been fairly resilient as people still need to get around for work and in their personal lives.
“There are competing market forces at play. While raising interest rates might reduce the demand for finance on the one hand, increasing vehicle prices are likely to stimulate the demand for finance on the other.”
The need to check where customers are sourcing their funding will continue to be important.
“The slowing and, in some case, dropping of house prices will also mean people are more reluctant to talk to their bank or increase their mortgage,” he says.
“So, it’s important that dealers ask the question and have a finance conversation with their customers.”
Alternative products may also increase in appeal to customers.
“The use of assured future value products, which can sensibly spread payments, provide a level of comfort for customers as well we reduce their regular payments are likely to really be appealing to customer during this time.”
Samuel Cavanagh of online loan broker and aggregator Fast Car Loans says mortgage rates are already rising, and that’s making dealer finance more appealing.
“Rising rates are happening as we speak. In the last two months I’ve seen the fastest rate rises in the assist market in my time.
“The margin between mortgage finance and asset finance has closed a little, so there is an easier conversation with the customer.
“But the most important factor is the continued slow service from banks, which gives dealers and brokers the edge.”
He says the downside is consumer demand will probably wane.
“Consumers’ pressure to pay rising mortgage costs will have an impact on their willingness to upgrade vehicles,” he says.
“However, we’re still seeing buyer demand and conversion rates hold up well.”