At first glance, it does not make sense. Despite economic doom and gloom, Mercedes-Benz is all aglitter. The luxury German marque has just notched its best month in history, selling more than 4300 cars in June.
As the next graph shows, June 2020 was actually a high-water mark for several luxury car brands.
This is counter-intuitive — and for that reason, it’s very much worth paying attention to. What we think is happening in the economy — reluctance to spend, fear and doubt — is not as important as what is really happening.
So, what is happening?
Mercedes-Benz cars Australian spokesperson Ryan Lewis admits the company did not see the burst in sales coming. “It was a genuine surprise,” he said. “We were selling basically everything that we had available… I’d be lying if I said we had a complete understanding of it.”
Thanks to that big spike in June, BMW and Audi have erased the shortfall of sales they experienced in April and May and total 2020 sales are ahead of where they were this time last year.
Of course, car sales usually spike in June. You can see that in the chart. People get their purchase in before the end of financial year for tax purposes, and car yards offer “EOFY sales”.
The government’s instant asset write-off has helped boost car sales. That’s a factor helping the market overall. Total vehicle sales in June were up on May but down around 6% compared to June 2019. So the government’s scheme can’t fully explain the luxury car sales bonanza.
The June spike in sales was mostly limited to the top end. Hyundai sales, for example, picked up compared to May, but were 23% below June 2019. Suzuki sales were 17% below June 2019.
Interestingly, the sales uplift did not extend to the very top of the luxury hierarchy. June was not a big month for super high-end cars — the kind you buy with wealth, not income. Sales of Rolls-Royces were down 70% on last year, Lamborghini sales were down 68% and Ferrari sales fell 44%.
Who’s feeling rich right now?
The pandemic has created a curious paradox. Most high-income earners have not lost their jobs. They are working same as ever, albeit perhaps from home. What they have lost is many of their opportunities to spend.
We don’t have data on Australian earnings and savings by income quintile, but we do have some data from the UK, which is illuminating.
The Bank of England reports British households now have a total of £25 billion in the bank, up from under £10 billion pre-pandemic and it’s the high-income earners who have been stuffing their bank accounts.
The next graph shows that people earning more than £55,000 (A$99,700) were saving the most.
In the US, a similar phenomenon is visible. The next chart comes from an academic paper by researcher Natalie Cox of Princeton University and co-authors. It shows average checking account balances, which are up sharply in the US since the start of this year.
Why have savings balances increased? Partly because incomes are actually higher after taking into account government transfers. But mostly because there are fewer outlets for spending now.
As the next chart shows, using US data, total income is higher across the board, and spending is much lower in the top income quartile.
In Australia this same pattern is likely to hold. For example, we know wealthy people usually spend far more money on recreation than the less well-off.
The top income quintile outlays $90 a week on restaurant meals, for example. While there has doubtless been some substitution into UberEats during the pandemic, food-to-go is rarely so high end (plus it is harder to be the victim of a skilled sommelier on an app!), so expenditure in this category has surely fallen.
Overseas holidays show a similar pattern, as the next graph shows.
The wealthy spend more than $5000 a year on overseas holidays. That money hasn’t been spent in 2020, and now it probably won’t be. Instead it is burning a hole in silk-lined pockets.
All of the above data is not definitive proof that it is higher savings causing people to rush to buy fancy cars. But it is suggestive. Eventually the money has to go somewhere. Perhaps that money is helping people to upgrade when they would otherwise not have, or to bring a scheduled purchase forward.
Another alternative?
It’s tempting to construct an explanation for the rise in luxury car sales that relates to the idea public transport will be unpopular for a long time. Due to perceived infection risk, trains, trams and buses are definitively on the outer, it is true. But any such explanation must contend with the fact that less expensive car brands haven’t seen quite such a resurgence.
How many people decide to no longer catch the train and buy instead a Mercedes SUV? There must be some. And perhaps if you know you’re going to be driving a lot more over the next few years, you decide to get yourself a really nice car. But still, that explanation seems like a stretch.
What will help us understand the difference is looking at other high-end spending. Watch these pages for more analysis of this phenomenon as it comes in. I will in particular be keeping an eye on house prices. For now house prices are in limbo, with few houses being sold. But all those Mercedes need a nice driveway to park in.
The same phenomenon that pushes up sales of Mercedes could put a floor under house prices at the top of the market. The spring selling season could be especially revealing this year.
So what that means is that money that would normally go into the pockets of Australia’s poorest (gig economy workers, hospitality staff etc) may now be going into the bank accounts of Australia’s highest paid?
Gotta love capitalism. It just won’t die.
Interesting article. I look forward to the follow-up ones.
No, it’s certainly dead.
The only movement is the necrotic worms gnawing the innards – their excrement can be seen in any rag published by their host, NewsCorpse, where Truth goes to die.
It would be interesting to know if the sales of Mercedes, BMW, Audi & Lexus were predominantly for electric models.
As electric cars aren’t cheap they are unlikely to be purchased by people in lower income groups & it would explain a surge in the above-mentioned marques. With the savings from cancelled international holidays perhaps it’s timely to invest in a 21st century vehicle.
> It would be interesting to know if the sales of Mercedes, BMW, Audi & Lexus were predominantly for electric models.
I can answer that!
– Mercedes Benz sold 44 of their electric car, the EQC, representing around 0.4% of their total cars sold in the month of June
– Audi sold 0 of their electric car in Australia in June
– BMW sold 6 i3 and 2 i8 for a total of 6 electric cars in June, representing 0.2% of their sales
– Lexus does not offer an electric car.
– Porsche does not yet sell its electric Taycan in Australia.
In summary, electric car sales are not the reason for the sales surge.
Thanks for the info, Jason.
> electric car sales are not the reason for the sales surge.
Probably not for most of them, however there may be a certain amount of people who notice the success of Tesla, and the end of ICE cars for Volkswagen. They then might think “How long will it be before I can no longer buy the top end car I always wanted” ?
Sure, most of the luxury brands will be offering EVs sooner or later (some already), but none of them quite match a Tesla model S yet, and brand is everything. So they will go with their old dream.
Tesla is nice, but that new VW EV Kombi being released next year. It looks mighty fine.
Wow, nice to know they’ve caught up with the alt-tech movement.
After moving off grid and far from towns my 68 Kombi ran firstly on methane – bit of fiddling necessary to by-pass the carburettor (necessary to start it in northern hemisphere winters) – from the repurposed septic tank but once we had the windmill running (at first using ITS dynamo! – was that incestuous?) entirely off battery, firstly it’s own 12V and then an array of those discarded by neighbours who discarded their faithful, unkillable old Fergies & Fordsons.
It hauled hay, wood, turf and living things for years before the floor disintegrated (no chassis) from rust – uric acid is very severe.
Back in the day there was an ad for Kombis – “take a box, put a wheel at each corner and an air-cooled motor at the rear.”.
The Transporter was heresy.
Wow Indunn, respect, you really are a tragic. LOL. Unfortunately VW will probably totally over-price the new Kombi (as they did with the retro bug), so in reality I might end up with one of those Chinese $7K cheapies, which could be fun in it’s own right.
Ta Bref.
I forgot to say that the engine was, and still is from reports, an excellent irrigation pump running 4 hoses out of the spark plug holes, powered by the river.
Who doesn’t think that China will take over EV production?
Someone on Whirlpool has been recording total number of used car ads on CarSales – https://whrl.pl/Rf6iyI – down to ~150k from ~200k at the beginning of the year.
Anecdotal reports from that thread are that used car sales are booming.
Excellent Jason. This WAS my bread and butter, take some data and build a narrative around it, as long as you don’t buy your own story and try to prop it up when the facts change.
I’d be interested in understanding more about the tax considerations. If they’re being bought by business men and women, it would have to be under leasing arrangements, which shouldn’t really be affected by a build up of cash in bank accounts. I think the business tax write off only applies to small business, and anyway you might be able to find out if they were bought by companies or persons. I don’t think you can automatically write off a luxury Mercedes soft top for your tradie business. Perhaps the ATO might like to be checking business tax deductions mighty closely this year. God knows the PAYE taxpayer is going to get drilled for every tax deduction.
Look forward to the follow up. Remember to ditch your theory as soon as the data no longer supports it.
He hews to economicism – the theory is perfect, it’s reality that is at fault.
How many at the pointy end of the plane ever paid out of their own, bulging pockets?
It was always a tax deduction, like subscriptions to the AFR Slim Review, advertising and a thousand other deleterious, when not utterly malignant, elements of modern life heading into the sunset of vanities.
In today’s Neolibs Rule OK world, it doesn’t matter whether it’s a boom, a recession, even a depression, or a Black Death plague; the rich get richer, and the poor poorer. OK, got it now? You simpletons.