In its modern form, the classic car market has essentially been in existence for a little over 40 years. The market was born in the heady period of the mid-1980s, a time when cars which were just old, were beginning to be viewed in a new way. Mercedes Benz dealers were buying R107 series SL models from customers over list price – such was the demand, and the 911 Carrera 3.2 in Guards Red was the City’s Yuppie car of choice.
Throughout its existence the market has seen boom and bust several times over – but what it has not encountered is inflation at a rate that the UK is currently experiencing. The rampant inflation rates experienced throughout the 1970s were over by the time the classic scene emerged, so we are now in a situation that the market has not experienced before.
This is combined with interest rates changing at a rate that we have not seen in many years which has a two-pronged effect on our business; the lending rates that we are offer are increasing (these have typically moved from a range of 5-8% to 8-12%) and rising mortgage commitments are having an impact of household finances. At the time of writing, the Bank of England interest rate is 2.25% and forecasts suggest that this could rise to a range of 4-6% during 2023. In July 2007 the interest rate was 5.75% before it fell steadily to 0.5% in March 2009.
In our business, we traditionally look at affordability when it comes to lending against assets and in simple terms a client’s income versus their expenditure. Due to nature of the wider macro-economy what we are increasingly also having to review is a stress-testing of this net difference. We must compare how outgoings will increase throughout the period of the loan due to inflation in regard to electricity, gas, groceries and fuel in order to have a more rounded view of each application.
The industry has had mixed views on whether younger generations (Millennials and Gen Z) will engage with the classic sector as much as those who have come before them, and for the majority of this segment of society they wouldn’t have known interest rates at this level during their working lives. In October the average new two-year fixed rate mortgage broke through 6%, the first time since November 2008, at a time when many of those in these groups would be buying their first house, taking a step up the property ladder, or starting a family. As they face increasing monthly mortgage payments, with bills rising around them, it would likely be fair to assume that the buying of non-daily cars would not be a priority for many.
So, thinking through the above here’s the Johnson crystal ball.
- The number of high-ticket specialist car purchases funded by large amounts of borrowing will decrease. Borrowing cheaply by cashing in on a rise in house prices and releasing equity at 2% is over and lenders are getting twitchy about the outgoings of buyers.
- As people exit cheap two-year fixed mortgages which they obtained post-Covid (many buoyed further by a Stamp Duty holiday) and re-mortgage at 6%, the thought of an expensive toy in the garage with a high monthly payment will be less palatable, or even not financially viable.
- For those in the younger generations who have not entered the specialist car market, they will delay doing so as they assess their financial priorities.
- It is widely considered that the low interest rate period starting in 2008 was the trigger that led people to pour money into classic and sports cars as they sought assets to hold money in. This drove the market-wide rise in prices from 2009 to 2014, but if interest rates continue to rise and it is possible to receive 5%+ risk-free it would seem logical that the reverse could happen.
I’m not one for doom and gloom, and it isn’t in my benefit to talk down the market, these are just how I see the current situation playing out. I don’t think there will be a crash, but probably something more akin to an ‘adjustment’ as we saw in and around 2017. I just don’t see how the strength of the market that we have seen post-Covid can continue at the same rate with so much going against it. Despite all of this, the winners will be those of us who don’t see cars as something to invest in, but instead something to cherish, enjoy and hold through the good time and bad.