The Monterey Car Week, which was held over the weekend, is an important milestone in the classic car calendar. The richest car auction of the year was held at Pebble Beach and expected to print $380m in sales. In fact, it recorded sales of only $245m, marking a 34% decline in year-on-year takings.
The low point of the weekend was the failure of one particularly high-profile lot to meet its reserve price. The 1939 Porsche ‘Type 64’ reached a price of $17m before the bidding petered out. The situation had farcical undertones as Maarten ten Holder, the auctioneer, who has a heavy Dutch accent, was calling out $14m, $15m, $16m but the digital display was showing $40m, $50m, $60m. Those present said that because ten Holder is Dutch, his ‘14 million’ sounded like ‘40 million’, so both the screen operator and audience were confused. The auction weekend has something of a festival atmosphere so the bidders/spectators who were watching the visual display were cheering on each record-breaking step up.
When the auctioneer intervened to point out the reality of the situation:“I’m saying 17, not 70… That’s 17 million,” (Source: CNBC) the bidding stopped and the boos and catcalls started. The Porsche failed to meet its $20m reserve price and remains unsold.
The across the board drop in sale receipts marks a slowdown in the market. The classic car market is a bellwether that many investors who don’t even have exposure to the sector are particularly sensitive to. The market grew out of baby-boomers reliving their youth and base values continue to be underpinned by middle-aged men and women who find intrinsic value in owning the vehicles.
The market’s role as a leading indicator comes from the fact that the cars are often the thing people buy when they have bought everything they need, so act as a measure of highly disposable income. In addition, the price history shows that, at times, the market is overtaken by speculators and investors before falling back to base level prices. This second surge of hot money reflects the amount of liquidity in the financial markets in general.
Two questions were being asked during the Pebble Beach sales: the first was, ‘what did he just say?’ and the second, ‘is the market is due a significant correction?’.
Pricing in the classic car market is particularly opaque. An illiquid market, it is associated with long holding periods when the condition of a vehicle can be significantly altered. There is also concentration risk as the market for one make or model can be impacted by tastes and fashion.
The pricing is therefore to some extent seen as unreliable as a car from the 1970s that hasn’t been well maintained. The failed sale of a high-profile Porsche is significant, but those reports that are available suggest prices may be softening – but not dramatically. There is a case that the excitement of the Pebble Beach auction doesn’t signify the start of a major correction.
UK – Market trend for ALFA ROMEO SPIDER 1900 to 2019 in United Kingdom with outliers removed:
USA – Market trend for ALFA ROMEO SPIDER 1900 to 2019 in United States with outliers removed:
Some of the price strength in the UK market looks to be based off currency moves. With the US being the biggest market for classic cars, the prices are typically set there. As the dollar has strengthened against sterling, the prices of cars in the UK have shadowed the forex move.
USDGBP – Five year price chart:
Taking the Porsche 911 (and excluding peaks caused by outliers), we can see a similar trend of prices flatlining since 2015.
The classic car market is of course full of car salesmen, but moving away from the stereotypes, it’s refreshing to see a more pragmatic appraisal of the market being made – even by those with skin in the game.
Justin Banks, who runs the eponymous classic car dealership in Kent shares the view that the market could be cooling.”
“For the next few months I expect prices to remain exactly where they were last month – we cannot push the market. I think the market will be stable but will not grow at the rate we have experienced over the next year… The people declaring an imminent bust are usually those who want to buy a Dino but missed the boat a couple of years ago! The underlying market forces bear no resemblance at all to the crash of the late 1980s.”
Source: Classic Cars for Sale
His reference to the crash of the 80s highlights an event that still lingers in the industry and challenges its reputation as an alternative asset market. A Ferrari 275 GTB went from being valued at £750,000 in 1989 to being priced at £100,000 less than 12 months later.
James Knight, of Bonhams & Brooks auction house, described the events of the late 80s. He said:
“It really was something. People were buying these cars in the blind faith that the prices were going to keep jumping in value.”
Source: The Telegraph
Even nearly 20 years later, the classic car market has not fully shaken off the events of the late 80s. When compared to other market bubbles, it falls into the same category as Dutch tulip mania and the dot com bubble. Justin Banks and other dealers will likely take comfort from the market coming to a rest in an orderly manner. If anything, it reflects a degree of maturity that was missing during the last correction.
Analysts at Market Realist have crunched the numbers on the share-price and valuation of Beyond Meat Inc (NASDAQ Ticker: BYND). Their report shows its Enterprise Value To Sales ratio of x29.69 is much larger than the other firms in its sector. It currently has 400 employees and a market capitalisation in excess of $8bn.
Those worried that the markets are due a correction might ironically find a car crash style correction more likely in asset groups other than the classic car market.