Yet more pain for the car industry, this time in the UK, where new car registrations were down 36.8 per cent year-on-year in November.
That’s the biggest decline since 1980.
According to the Society of Motor Manufacturers and Traders (SMMT) it could have come about because:
The fall in private registrations may have been partly driven by a government announcement late in November that value-added tax would be reduced by 2.5 percent from Dec. 1, cutting 250 pounds ($367) off the average price of a new car for buyers who waited, the SMMT said.
The VAT factor may have something to do with it for sure. But there’s certainly more at issue, as reflected by falling sales across Europe, not just the UK. Yesterday, Germany’s auto industry predicted the worst year for domestic car sales since its reunification in 1990. ACEA figures for the first 10 months of the year meanwhile show car sales in Europe are down by 5.4 per cent.
Is it as simple as people having no money to spend on autos?
Perhaps stating the obvious, back in the 1980s and even the 1990s if you wanted a car you had to save up for one. The naughties meanwhile have been dominated by aggressive sales combined with aggressive financing - both car dealer and banks offering attractive rates on car loans. Based on that, one can assume the car market suffered a similar over-inflation to that of the housing market.
If that is the case, as financing is pulled from customers, depreciation of current assets becomes an increasing concern. Depreciation, of course, is factored into the car market much more so than the housing market. But if the rate of depreciation is speeding up beyond even the expectations of the loan holder, that really risks destabilising the car-renewal balance. Hanging onto your finance-funded 2005 model makes much more sense then switching for a much inferior 2008 model. You simply can’t stand the loss.
This puts the car market in somewhat of a catch-22. The more dealers slash prices to attract customers, the more they devalue current the assets held by prospective buyers still paying off their loans. A negative car-equity trap, so to speak.
Fitch rightly flagged up the potential problem of depreciating “residual value” back in October.
In the auto industry, the RV risk refers to the risk that the value of the car on the secondary market may differ from that set in the lease contract first used to acquire the vehicle.Depending on the securitisation structure, the RV component of the lease contract is either directly securitised, i.e. purchased by the SPV, or the RV component is used as additional collateral in transactions where only the lease instalment is being securitised.
Typically, the expected RV is determined by the lessor and set at a value equal to or lower than the expected market value of the vehicle at lease maturity. Effectively, the lessor has to anticipate the future market value of the car, which depends heavily on the level of demand when the vehicle is returned to the dealer. Until now, car sale proceeds obtained in the European secondary market have been broadly in line with the expected RV set at the inception of lease contracts.While used car prices in Europe have not demonstrated any material changes as, generally, vehicles sold in Europe are smaller and more fuel-efficient, some market experts and car manufacturers have hinted that they expect Europe to see the same deteriorating sales trend in the US.
It doesn’t take Meredith Whitney to figure out what that means for the securitised products linked to car products and car sales respectively.
What’s more this depreciation of second hand stock that is what’s specifically hurting car dealers like Pendragon stuck with a lot of inventory.
Anyway, if you’re in the market for a new car, at least stay away from those that are depreciating most. According to Sky Motoring the quite executive-looking BMW 7 series 750i Sport (no connection to city job losses err hmmm) is currently holding up worst, depreciating no less than 63.9 per cent in one year.
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