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%.
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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.
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.