Classic Car Valuations – Leading Indicator or coincidence?

Investments tend to follow similar trajectories. Valuations remain subdued, sometimes for extended periods, then they begin to recover slightly. This recovery is monitored by professionals who begin work on their entry point. Once this is established they go to work. As each person sees their entry point they jump in. However, human nature, in the form of “risk aversion”, means investors always have a quick look back at the assets performance in order to provide some reassurance, a sanity check so to speak. Some will see the upward trajectory and feel they’ve missed the boat and pull back waiting for a short term weakness entry point, which they’ll then exploit and so it goes on. This explains the shape of asset class return charts, which tend to look like saw blades in shape. This also works in reverse, with investors “anchoring” on the value they still believe exists which the market doesn’t. They hold on for as long as they can…then jump out forcing valuations down further. However, property and classic cars are different, why?

Because there isn’t a fully indexed and totally liquid benchmark in the traditional equity sense. Yes, there are some loose benchmarks which measure Classic Car prices on a basket of the most rare and valuable vehicles offered for sale at the most prestigious auctions around the world, and broad baskets of commercial property and average prices quoted by mortgage companies for residential property, but nothing like equity investments. This leads to one problem, a liquid equity bubble will be arrested much more quickly than that of illiquid assets such as cars and property simply due to the general lack of gearing (borrowing). Most equity books are held by a collective of investors who’s capital seeks alternative homes for their cash or retirement savings, who can and will react quickly to changes in events. Property, and now more regularly classic cars differ due to the levels valuations have reached due significantly to gearing. All but a tiny minority who can afford to buy their property with cash use borrowing and this is key.

A multi-millionaire who’s Ferrari 250 GTO loses value at some point in the future, will likely be able to simply store their asset away and await the resurgence in its value, almost regardless of how long this takes. This is not the case with assets purchased using borrowings, which is actually a relatively recent phenomenon. Until relatively recently classic cars were the preserve of chaps with a few bob from their pension tax free cash lump sum, or business sale, who wished to indulge their desire to buy the car they lusted after in their youth. The growth in this retiring legion of baby boomers has assisted the dramatic rise in classic car prises.

The problem we are now experiencing was last seen in the 90’s, when the population of the country bought shares wholesale in privatisation issues as we all jumped on the equity band waggon. And of course more recently in 2008/9 after we thought investments seemed only to rise! Are we returning to this point again? Firstly, the national savings rate is as low as it has been since the 60’s; this statistic doesn’t measure what we’re doing with out savings, simply the percentage of our earnings we “save”. Secondly, the ease with which we have all become comfortable with borrowing. In historical terms this is only one or maybe two generations old. Remember, if your grandparents were luckily enough to own a car they will have saved to buy it which is why that generation kept cars for such long periods and often were able to buy another and stored the old one away. “American” car finance broke the mould in the 90’s meaning 80% of vehicles on UK roads are financed in this way making them actually only leased rather than bought – who makes the final “balloon” payment theses days? This is driven by the desire for instant gratification and causes bubbles to form so much more quickly than ever before.

I would generally be less concerned about the Classic Car market for the reasons more generally discussed, as there is certainly a very limited supply of “nice” classic cars which will always be the case. Cars were wonderful, beautiful things until the eighties, since then the sheer number of cars manufactured will almost entirely remove their rarity, therefore genuine rarity of early era vehicles will always be implicit. However, to my earlier point, they are not easily liquidated assets, And not easily or cheaply disposed of and if they’re purchases with debt…?

Personal borrowing is currently at pre financial crisis levels annualising at 8.3%, so we should be cautious. The last time car values reached anything like current levels, was in the nineties when the boom in Big-Bang-City-Brokers-Bonuses funded an almost entirely cash driven boom – this is not the case this time! If your vehicle is in the financial category which can be met by a bank loan and a twenty grand cash deposit then beware! These are at most risk now western markets have entered an interest rate rising cycle. The HAGI Top Index, the index of the broader investor car market, was up 15.52% as at November 2015, surpassed in 2014 when the index was up 40%! Growth is certainly slowing yet geared investors are still piling in. Unless you live on the moon you’ll have seen that China may have forced, prematurely, global equity markets into their next cycle, the U.S finally put policy rates into a rising rate cycle on the 16th of December 2015, with the UK likely to follow this year. This shows the rude health of the U.S. economy of course, but if this encourages further borrowing the bubble will just get bigger – So please consider this “investment bubble check list” 1. Savings rate at historic lows – Check. 2. Asset Prices at record highs – Check. 3. Personal Borrowings to buy said assets at record highs – Check. 4. Asset liquidity minimal – Check. ¬†You have been warned!

The following blogs hopefully highlight other behavioral signals which you might find interesting on this subject and many more.

 

 

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