Why we pay too much for cars

ScreenHunter_3970 Sep. 03 09.56

By Leith van Onselen

The Pascometre has written a timely piece explaining why Australian car buyers are ripped-off and demanding policy action:

With manufacturing on the way out anyway, [the Productivity Commission has recommended] to drop the present stiff barriers on importing second-hand cars.

…if you have an existing fleet of vehicles, that is a potential disaster…

The immediate response from the federal government, no doubt after a quiet word or a million with the Federal Chamber of Automotive Industries, is a great deal of wariness about letting consumers enjoy a free trade price of cars instead of paying the “Australian premium”…

In wording that could have come from a car importer, Industry Minister Ian Macfarlane said “…the government has no intention of allowing Australia to become the dumping ground for other countries’ old second-hand vehicles.”

Never mind that the PC didn’t recommend anything like that, suggesting imports should be limited to cars less than five years old and phasing the changes in to give fair warning of the disruption…

Looks like the poor who insist on driving will just have to stick with their old, less-safe and less-fuel-efficient bangers.

Pascoe makes a lot of good points that support my own arguments last week following the release of the Productivity Commission (PC) report.

With the local automotive industry scheduled to shutter by 2017, there will no longer be any justification for punishing Australian consumers with over-inflated car costs. New Zealand consumers have gained greatly from opening its market to high quality Japanese used cars, lowering costs for consumers without compromising the safety of its vehicle fleet.

As reported by in the PC report, “a survey of prices for second hand Toyota Corollas found that vehicles of similar mileage were on average almost 20 per cent cheaper in New Zealand than in Australia”. Moreover, a 2005 study by researchers at the Monash University Accident Research Centre supported the safety efficacy of used imports, finding that “the used imports [into New Zealand] were as safe as those sold new when compared on a year of manufacture basis, and that the difference in crashworthiness performance between an average used imported vehicle and an average new vehicle was attributable to the date of manufacture of the used vehicle rather than its previous use in its country of origin”.

Of course, allowing the importation of high quality second-hand cars is only part of the solution to lowering car costs for Australian consumers. Other worthy measures include:

  1. abolishing the 5% tariff on automotive imports;
  2. scrapping the the luxury car tax, which is set at 33% on the marginal cost of vehicles above $60,316, and serves as a defacto tariff designed to raise the cost of more expensive imports and make local models, such as the Fairmont Ghia, more attractive; and
  3. Scrapping Australia’s unique technical standards in favour of global rules, thereby opening the market to a wider array of foreign cars and reducing overall import costs. Indeed, the PC report also recommended accelerating “the harmonisation of Australian Design Rules with the United Nations Economic Commission for Europe (UNECE) Regulations and the mutual recognition of other appropriate vehicle standards”.

As noted last week, there would obviously be negative revenue impacts from the above reforms, namely the abolition of tariffs and the luxury car tax. However, such concerns could be overcome by simultaneously moving to increase the GST to, say, 15%, along with the usual compensation measures for the poor? This way, the tax burden would be spread more evenly across all goods and services, rather than concentrated on the car industry – a far more efficient and competitively neutral outcome.

Again, given that the car industry is set to close anyway by 2017, the least the government could do is soften the blow on consumers and increase their spending power.

It’s a shame that the Abbott Government has chosen to side with the automotive industry rent-seekers, kicking consumers’ interests to the curb.

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Leith van Onselen

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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Comments

  1. Nah – just allow us to import second-hand cars from the UK and Japan. Then we will be driving affordable cars way beyond our dreams…

  2. Much of it is just gouging by manufacturers particularly when it comes to European / luxury cars. A friend recently bought a Porsche and just for fun I wanted to see how much Porsche had fleeced him.

    Same model he bought is listed as $267k in Aus, and sells for almost exactly $100k in US. Only a small part of that is the LCT.

    I will never buy a car in Aus where the manufacturer gouges to anything like that degree. Limits me to Asian cars basically.

    • +1 and it’s not just the top end of the market. Go to Ford USA and have a look at how much a basic utility is in the US.

      We get royally shafted and the Laberal Party hacks watch on from their castle and smile at the silly peasants loaded with debt.

      • Wait till we get that AUD “correction”, then you’ll know what expensive cars look like 😉

      • Wait till we get that AUD “correction”, then you’ll know what expensive cars look like 😉

        I was looking to order a new Ducati when the dollar was at 110. I asked Ducati Australia why the prices hadn’t been coming down and they said “because it was unfair to people who had bought bikes when the dollar was lower”

      • Because capitalism? F***ing rent seeking bastards you just know they’ll hike the price when it goes to 70

      • Mining BoganMEMBER

        Aprilia guy told me much the same when I was looking at a RSV.

        Bastards.

        Just waiting now for money to get tight to grab a cheap one off an overexposed wannabe.

      • innocent bystander

        @MB A lot of tradies leaving Perth are dumping stuff on g*tree. Haven’t been looking at transport but tool listings ramping up

      • Just waiting now for money to get tight to grab a cheap one off an overexposed wannabe.

        +1

        Might be another 12 months or so to wait though, I think.

    • Its only in the luxury end these days(last 3-5 yrs), fortunately. Most things under 40K are reasonably priced.

    • Exactly. I won’t buy a new car unless it can be bought for similar money overseas.

      We pay an absolute mint for Euro luxury names, and its most likely the FBT novated lease rort that’s allowing it to happen. No-one would pay that money if they had to pay with after-tax cash.

      • FBT novated lease rort that’s allowing it to happen

        Definitely! It works out better if they pay more.

      • Have you done the math on NL Lorax – there is no joy there.

        Novated leases just facilitate the sale to people that don’t understand the debt and capital loss they are about to take on.

        In fact, the success of NLs is a total mystery.


      • In fact, the success of NLs is a total mystery.

        As far as I can work out, it comes down to people preferring to lose $1k of their own actual take home cash money if they believe (correctly or not) that by doing so they will deny the ATO $1 (one dollar).

        See also NG fuelled housing bubble, and research on the actual returns experienced by housing investors (spoiler: despite apparently ever-increasing house prices, profits are elsuive for many).

        Defenders of both NL and NG are aware of this effect, but generally ignore it when defending their preferred rent seeking rort.

        EDIT: $1k loss may be a significant underestimate.

      • @aj

        If you don’t care about the CL (buying a new car anyway), you might come ahead….just….but generally you can negotiate a similar deal.

      • ff ‘just’ is the word. I helped the fbt guys do the math on this for a company policy not long ago and i was actually shocked how trivial the benefit was relative to all the hype.

      • aj is mostly right – NLs have become much maligned for reasons which are not clear. Typical savings are around $1,500 pa but that’s based on a comparison with buying a car privately so includes tax & fleet discounts combined. Novated leases are subject to the same taxation treatment as standard company cars, leased or otherwise. The benefit actually reduces in more expensive (Euro) cars because of limitations on depreciation above the luxury car depreciation threshold, which means a higher cost to the employer. Euros are actually cheaper now than ever and the remaining price differential between here and overseas, with the exception of stand out marques like Porsche is, on average, a combination of the 5% import tariff and luxury car tax

      • Have you done the math on NL Lorax – there is no joy there.

        Over a 3yr period the cost is around the same as buying outright, but only if you have the cash to do it – if you have to finance a lease will be cheaper.

        However, leasing is attractive because you have the same advantage as buying with finance – don’t need all the money up front – but the overall cost over, say, 3 years ends up being basically the same.

        Eg: $28k car (VW Golf), 16,000km/yr, $90k income

        Buy outright: $28k up front plus approx $3.7k/yr running/ownership costs = $39,100 over 3 years.
        3yr lease calculator says $367/fortnight + $13,800 balloon = $42.4k

        So ~$3k more to lease (which you’d make the equivalent of putting that same $28k in a bank account for 3 years, or offsetting against your mortgage).

        Leases are also attractive to many people because of the simplicity – one payment, automatically deducted from salary, covers everything from purchase through petrol to maintenance. Plus, as someone else pointed out, for whatever reason most people see a huge attraction in paying less tax, even if that doesn’t change how much they pay overall.

    • Rent Seeking Missile

      “Same model he bought is listed as $267k in Aus, and sells for almost exactly $100k in US. Only a small part of that is the LCT.”

      Hahahahahahahahahaha

      That’s so outrageous you can only laugh. And they ask for protection with a straight face.

  3. How about scrapping novated leases for all expect those bought by companies and then keeping a log.

    • Most people lose on novated leases.

      1. They buy a car they can’t afford and don’t need;
      2. The tax benefits are trivial relative to the capital loss.

      • So they basically benefit only car dealers and the leasing companies at the expense of cosumers. At best they seem a form of idiot tax. At least for other idiot taxes, like tobacco and gambling, there are self-help groups you can join.

        Best thing the previous did was changing FBT rules to effectively get rid of them – although due to stiff competition, it is not clear whether undoing that change is the worst thing the current government is doing (for all governments, competition for ‘worst thing they ever did’ seems stronger than for ‘best thing they ever did’)

      • Yes. And the big leasing companies are foreign owned borrowing their money at 0% in Japan, their only cost is a currency hedge.

      • @aj

        But that doesn’t stop the loss in tax to government. It will go a long way to make up for the loss of LCT.

  4. The paradox of democracy: governments claim popular mandates for legislative policies but take advice from industries whose interests are not aligned with any mandate. No wonder electors don’t understand politics and distrust politicians

    • Voter is stupid.

      EDIT: If you distrust politicians why would vote for one? It’s like being suspicious the priest doesn’t just want to offer Ave Marias but you take your clothes off and sit on his lap anyway…

      • It’s an analogy, they have their usefulness, mostly to those capable of analogical introspection…

      • I’d hate to be the one that breaks this but there’s a logical inconsistency in stating the electorate is distrustful of politicians and the knowledge that they vote the same ones back in, en masse, at every election…

      • Only if you stipulate that the electorate acts rationally in its own best interests.
        Anyway, possibly, as in your “analogy”, there is some sort of Stockholm syndrome at work here – the electorate, while distrusting its captors, goes along with them anyway, partly due to a misplaced belief that their interests are aligned (in some way) with their captors’ interests…

      • Only if you stipulate that the electorate acts rationally

        Ummm, no! Its still logically inconsistent, no matter how much wishing and praying makes it look otherwise….

      • Irrespective, I see no reason to expect ‘logical consistency’ from the Australian electorate. There’s no particular reason why their behaviour alone in the ballot booth should in any way reflect anything said or done outside the ballot booth. This is the group that voted for ‘Big Australia’ and ‘stop the boats’ at the same time (by returning JWH so many bloody times, that is).

        Looking for ‘logical consistency’ seems to have as much point as looking for ‘theological soundness’ in Richard Dawkins’ PhD dissertation (Selective pecking in the domestic chick)

      • I wasn’t expecting logical consistency from the Australian electorate, I was expecting it from Jake Gittes….

      • Probably since being told ‘she’s my sister and my daughter’, Mr Gittes’ logic processor has become a bit out of whack…

  5. “As noted last week, there would obviously be negative revenue impacts from the above reforms, namely the abolition of tariffs and the luxury car tax. However, such concerns could be overcome by simultaneously moving to increase the GST to, say, 15%, along with the usual compensation measures for the poor?”

    Or alternatively, they could simply:
    1. limit negatively geared property losses to say 3 years
    2. eliminate use of trusts to split income disproportionately to value of work done (ie splitting 50% to non working spouse, or to part time working spouse, or low value wor by spouse.
    3. Tighten up rules on offshore structures, including transfer pricing, routing of IP income to low tax or tax haven locations – Google is a classic example.
    4. Increase the top marginal rate for people earning over say $200,000
    5. Tighten up the super rorts and reinstate reasonable benefits limits and institute progressive taxation of income from super, perhaps at higher levels of income or with a more generous tax free threshhold.

    • 2. This type of income splitting is only available to self employed people. It is impossible to do this as an employee, and it is already illegal unless the partner can prove they have worked under commercial terms for the salary paid. I don’t agree with it either, but don’t lump salary earners in to this group
      4. That would be a great move. The top rate from $180K is currently 49% plus other punitive measures such as higher tax on super contributions, penalties for not using private health etc. It’s already one of the highest marginal tax rates in the OECD
      5. It already has been tightened! Contributions tax for someone on $300K is 30% on contributions, providing a 19% tax break, less than the average wage earner gets. There is also a cap on contributions of between $25K and $35K pa depending on age – exactly where is the rort that everyone keeps referring to?

  6. “It’s a shame that the Abbott Government has chosen to side with the automotive industry rent-seekers, kicking consumers’ interests to the curb.”

    When have they acted in any other way? It doesn’t matter who is in power, in Australia, a golden rule remains true: rent-seekers > consumers.

    Our political parties have 0 accountability. A new political structure needs to be put in place.

  7. Why stop at cars?
    there are many Australian technical standards that make absolutely no sense especially in the absence of an indigenous manufacturing sector. Australian compliance becomes a consumer tax that is paid on all sorts of goods but its especially prevalent in the plumbing and electrical sectors. It acts to limit consumer choice because ever item needs a compliance license its complete BS no other word.

    Its time to end this insanity..I’m looking at you SAI Global.

    • Only know about cabling and wiring, but it is happening, painfully and line by line.

      To be fair to SAI Global (who don’t have a dog in these fights) the major blockers are (quelle surprise!) the utility companies, who seem to be at some level concerned about the effect aligning standards with IEC is likely to have on their budgets.

      Some genuine differences between Australia and elsewhere wrt underground cables due to weather conditions and widespread presence of termites make elimination close to impossible – however, standards covering the local exceptions are a reasonable goal.

    • Failed Baby BoomerMEMBER

      China-Bob, StatSailor,
      The Aus regulations over and above international standards on hazardous area electrical equipment are tedious and rent-seekind fodder. It also limits innovation and productivity in the industry.

      • The hazadous area standard I’ve most recently been forced to apply is IEC 60079 (i.e. the international standard), which has now been adopted in Australia, replacing a number of earlier homegrown standards. My experience was that the outgoing AS standards weren’t quite as bad, but that was probably very dependent on the situation to hand.

        It is extremely tedious, except where it’s vague, and it was often highly inappropriate for the customer’s application of our product, but it is World class tedium and ambiguity, rather than Australian-made. One such example was on some of the LNG projects which we bid on at a very early stage

        See here for blurb on the process of removing the AS standards from circulation:

        http://www.safetysolutions.net.au/news/36364-New-hazardous-areas-standards-released

    • innocent bystander

      stds are one thing. testing compliance is another. as are fake compliance certificates.

      here is a recall on 240v wiring. good luck getting a rewire of yr house if a tradie installed this brand:

      “The cables fail the required ageing tests of AS/NZS 5000.2:2006. The insulation could become prematurely brittle with age.”

      http://www.recalls.gov.au/content/index.phtml/itemId/1061753

      sold by: masters amongst others.

      • From memory (thankfully I no longer have a shelf full of standards at work) the PVC ageing requirement is one of those ‘tedious’ areas where Australian standards differ from international standards. Hence some O/S manufacturers don’t comply when first entering the market (they just re-label the equivalent product they sell in their own market). Infinity far from the first to struggle with this one.

        Note that due to receiving a larger amount of UV radiation than many other parts of the world, this is one of those thankfully rare times when Australia actually is different (assuming I’m thinking of the correct ageing test). The UV problem is a big drivers of the Wiring Rules’ various requirements, which potentially makes alignment of other supporting standards more difficult.

        Thankfully I have never had to deal with a plumbing standard.

        EDIT:

        Unbiased advice – tell your tradesperson he f-ed up by choosing that brand, so it’s his/her job to fix it.

        http://www.olex.com.au/eservice/Australia-en_AU/navigatepub_228625_-33906_285_40_1803/Recall_too_restrictive_ALL_Infinity_and_Olsent_cab.html

        “The initiator for the removal of all cable subject to this Recall must be the installer, as opposed to the consumer, since he is, in reality, the only person who will have sufficient knowledge regarding the location of the dangerous and defective cables”

      • That’s what you get when Engineering becomes a catalogue browsing affair.

        In software engineering we still design, tool, machine, cast and dye our end product.

        OK that’s not strictly true but it’s pretty much no expense at all to take an existing open source tool and remachine i
        t to your specs (as it were)…

  8. One of the issues with shipping cars to NZ is the corruption involved. If the importer has a tight relationship with the garages that inspect the vehicles, it’s all good. If an individual tries, watch out. The inspection may find a single rust bubble on the chassis and you will pay for the whole chassis to be sandblasted. It does happen. Even the loosening of a bolt on seats will require a $50-70 charge for tightening.

      • Doesn’t matter. The car can meet the strictest compliance in the world in Japan, yet still fail in NZ by a local compliance check, which is outsourced from the govt to the private sector, which is essentially nothing more than a suburban cartel. The work needed to meet local compliance is divvied out by the local compliance business.

  9. I imported the crashed and rolled over wreck of a classic 1969 American car and had to pay ” Luxury Car Tax”

  10. As noted last week, there would obviously be negative revenue impacts from the above reforms, namely the abolition of tariffs and the luxury car tax. However, such concerns could be overcome by simultaneously moving to increase the GST to, say, 15%, along with the usual compensation measures for the poor?

    Or you could just leave the LCT in place and do all the other things, for a much smaller hit to revenue and pretty much all the benefits.

  11. if we are cheapening our labour by too much import of “shortage” skills, then its only fair we cheapen goods as much as possible. Otherwise we earn third world wages and pay first world prices. I’d also suggest we extend mass issues of 457s to dentists and plumbers – got a $400 bill to clear a blocked toilet the other day, and only visit dentists when the pain is unbearable.

  12. he price tag to develop a new vehicle starts around $1 billion. According to John Wolkonowicz, Senior Auto Analyst for North America at IHS Global, “It can be as much as $6 billion if it’s an all-new car on all-new platform with an all-new engine and an all-new transmission and nothing carrying over from the old model

    Image how many billions are spent by car companies over the years to make their cars compliant with Australian Standards, with a tiny population they have to pass it on to someone.

    Add the billions that are spent to create and force compliance of these standards, are a waste of government spending as well. Australian Standards are different not better.

  13. There has never been any reason for Australia to have high Tariff barriers on any car imports. None whatsoever! We could have been over all of this stuff a generation ago. We have not made an economic car in this country ever & certainly not in the last 25 years. What were we thinking? There has never been any justification for ripping off the Australian taxpayer for substandard vehicles. None whatsoever. We could have moved on years ago & not had any of this stupid car company taxpayer rip off going on for so long. If we had had the balls to call it as it was in the 1970’s we would not be discussing this crap now. Crap production, crap product, crap result. Too stupid by half!

  14. Aside from digging up dirt, Australia is only skilled at ticket clipping and adding pointless middle-men. Of course they will be protected.

    I would love to be shown to be wrong on this, but Oz is now predictable in this regard.