Australian new car sales are tanking

• Australian new car sales fell sharply in December compared to the same month a year earlier.

• Some of the steepest declines were seen in NSW and Victoria, the states where home prices fell the most in 2018.

• Australian household consumption slowed sharply in the September quarter last year. Coupled with recent softness in retail sales, weakness in car sales points to a continuation of those trends in the final three months of 2018.

• Financial markets are now pricing a small possibility that the RBA cash rate could be cut by the middle of this year.

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New car sales in Australia are tanking, adding to concern about a housing-led spending slowdown in the quarters ahead.

According to data from VFACTS, the Federal Chamber of Automotive Industries (FCAI) statistical service, new car sales slumped 14.9% in December compared to the same month a year earlier, driven by weaker sales volumes in each of Australia's states and territories.

VFACTS said that 87,528 new vehicles were sold last month, a decrease of 15,292 on December 2017. At 24, the number of selling days last month was unchanged from a year earlier, indicating the drop was not impacted by seasonality but other factors.

By location, sales slumped by 20.6% in Tasmania, 19.7% in New South Wales and 17.9% in Victoria from a year earlier, leading the declines across the nation over this period.

Mirroring the geographic performance, sales of all vehicle types were lower than December 2017, led by a sharp fall in passenger vehicles of 26.3%.

“New vehicle sales results in 2018 reflect a challenging climate across the Australian economy including a slowing housing market, tightening of money lending and the drought,” said FCAI Chief Executive Tony Weber.

Over the year, total sales stood at 1,153,111 vehicles, down 3% from the record level set in 2017.

As seen in the chart below from the FCAI, cumulative sales were either higher or the same as 2017 up until the middle of last year. However, that trend reversed in the second half of the year, coinciding with a deepening slide in home prices in Sydney and Melbourne.

According to data from CoreLogic, Australia's median home price fell by 4.8% in 2018, a result largely reflecting declines of 8.9% and 7% respectively in Sydney and Melbourne.

The nationwide decline was the steepest in percentage terms since the GFC with falls accelerating in the final month of the year, sliding 1.1% as Sydney and Melbourne valuations tumbled by 1.8% and 1.5% respectively.

On face value, a declining wealth effect from weaker property prices appears to be deterring households from buying new cars, often the second-largest investment families make behind purchasing a home.

Following weak household consumption in Australia's September quarter GDP report, recent signals from new car sales and broader retail turnover points to a continuation of those trends in the final three months of 2018.

While Australia's Q4 GDP report won't be released until early March, Australia's November retail sales report will be closely scrutinised for any signs of a further slowdown in spending when it is released late next week.

According to National Australia Bank's cashless retail sales index, a separate report on electronic spending patterns that aims to predict movements in the official data, sales are likely to grow 0.4% in November, helped by Black Friday and Cyber Monday sales.

While such a result would be an improvement on the 0.3% increase reported in October, the NAB says underlying spending growth was probably weak during the month.

"November saw extensive promotion of Black Friday and Cyber Monday sale, relatively new events for Australia,” said Alan Oster, Chief Economist at the NAB.

“These events are unlikely to be fully captured by the current seasonal adjustment patterns just yet, which means the underlying result is likely somewhat weaker.

“Furthermore, these events have probably brought forward some Christmas spending, which points to a downside risk for December retail sales.”

Although policymakers at the Reserve Bank of Australia (RBA) still believe the next move in official interest rates in Australia is likely to be higher, increased concern about the outlook for both the Australian and global economy has seen financial markets begin to price in a small chance the RBA may be forced to cut the cash rate again by the middle of this year.