Auto affordability is close to a 10-year low in Europe and is currently hovering around 2008 levels in the US, Morgan Stanley analysts said in a Friday note.
“Our analysis highlights that monthly auto expenditure (lease+fuel+insurance) is the highest it has been in decades, with current ASPs, interest rates, and running costs implying a total monthly payment c.40% above historical averages,” analysts at Morgan Stanley wrote.
In Europe, auto affordability is near a 10-year trough when compared to disposable income and at 16-year lows in the US.
This sharp decline in affordability comes after years of improvement driven by income growth and low interest rates, Morgan Stanley noted. However, the recent significant expansion in ASPs has reversed this trend.
With interest rates now much higher than in recent years, disposable income growth slowing, and an uncertain macroeconomic outlook, consumers are struggling with the current levels of expenditure. Analysts expect this to place downward pressure on vehicle pricing in the coming months.
“After a period of record earnings for OEMs, we see pricing as the key lever to improve affordability for consumers – which drives our cautious view on OEMs margins and performance,” they said.
Analysts also said that OEMs may continue to implement "hidden" price cuts through marketing promotions like 0% financing or dealer rebates. While these strategies may not appear as direct reductions in ASPs, they are expected to impact OEM earnings before interest and taxes (EBIT) margins, which remains central to the analysts' negative outlook on the sector.
“Affordability could also improve through a faster reduction in interest rates, or a significant improvement in disposable incomes. OEMs may also grow volumes to offset pricing headwinds, offsetting a decline in absolute EBIT.”