In its second quarterly report for FY19, the SBP's “State of the Economy" has calculated an interesting number: Rs10,476! This is the total dual impact per month of the increase in the cost of car financing due to the interest rate hike and the price escalation of locally assembled cars. The authors of the section argue: “The financing cost per month for an average customer (car buyer) increased by Rs10,476 per month, which proved to be high for the borderline consumers". That's about Rs125,000 annual increase in the cost of the car. The report also claims that car financing was down by Rs9 billion to Rs11.7 billion in 1HFY19—a year on year decline of 44 percent. The report concludes that these are the two major factors that have led to a 3.6 percent reduction in automotive manufacturing during 1HFY19.

Taking these statistics as they stand (both the impact per month and the reduced car financing), can we deduce that an average car buyer is in fact quite sensitive to price changes? For a car that cost Rs1.5 million—this should fall above the category of Suzuki's Wagon-R, Cultus, Mehran, Bolan etc. which cost between Rs700,000-Rs1.3 million and below Toyota Corolla and Honda Civic which cost upwards of Rs1.8 million (prior to the price increase)—a consumer is unwilling to pay an extra 0.7 percent of the cost of the car per month. This implies that a car buyer that pays Rs30,000 per month for five years, is unwilling to pay Rs40,000 per month instead—give or take.

Based on the prices that we know for mid-variants of Honda City and Toyota Corolla, we can estimate that the impact per month for these cars is on average between Rs12,000 to Rs15,000 per month. But the problem is two-fold; one: we don't know how many of the customers for each OEM go for car financing, an average number is that 40 percent of all car buyers go for bank lending. It is unclear which segment is more or less sensitive to the cost of buying a car. Two: car sales have actually grown in 1HFY19. Honda by 11 percent, Toyota by 10 percent while Suzuki Cultus and Wagon-R also grew by 13 percent and 14 percent respectively.

In fact, the reduction of 3.6 percent in production as quoted by SBP is actually brought forth by decreased demand of tractors, trucks, LCVs, SUVs and motorcycles. Car purchases fell by only 1 percent in 1H and mostly because of falling demand for Suzuki Mehran and Bolan.

But if car sales have not stalled, but car financing has come down, two of the following is possible: either sales numbers do not reflect car bookings (so the effect of price will start to demonstrate any day now) or consumers are switching to cash purchases.

If over the next few months, car sales drop or become stagnant despite the government taking back the restriction on non-filers to purchase cars, we will be able to conclude for sure that Rs10,000 is worth quite a lot. First, it makes up for the difference between a car buyer's decision to purchase a car or delay for now. Second, this is not restricted to buyers of Mehran and Bolan but in fact true for mid-income and upper middle income car buyers.

And third, even if these quick calculations are not on the mind of a consumer, overall economic downturn as well as future uncertainty is an appetite suppressant. No consumer is going out on a limb to make a major purchasing decision, especially if it is on credit. He will lie in wait.