The UK's largest car dealer had a bad day yesterday. It issued a profit warning and its shares fell by 17% in value. Why? Because new car sales are down; big discounting by manufacturers is hitting margins and second hand prices are falling.
The first two are signs of a down turn.
You could say the last is too, but it's more worrying than that. Eighty five per cent of all new car sales are on leasing contracts that have a residual value built in. If the second hand price of cars falls many of the valuations will be too high. And that means that those debts are now loss making for the banks that have issued them. Under new accounting rules they should be anticipating those losses this year. Wait for banking provisions, and so losses, to follow.
I doubt this will be the start of another financial crisis. But it is a certain sign of stress created by debt, yet again. When will we learn?
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
Savvy ‘investors’ (by which I mean speculative options traders) in the US have placed their bets a while back on the meltdown of the car loans market.
Santander (hopefully US division only) is expected to be major loser in this ‘game’. But they will be by no means out on a limb by themselves.
Knock three times and ask for Porter Stansberry. But it’ll cost you to get the gen. I can’t afford it.
I don’t need to say ‘caveat emptor’ do I ?
The financial Masters of the Universe yet again coming up with a “clever” package where everyone’s a winner and a gullible public thinking they’re getting something for nothing – a new (and bigger) car every 3 years – because this time it’s different…until the initial assumptions prove unfounded.
No, we never learn and the Rip van Winkles of regulation slumber on.
Considering car sales where doing well until april I would suggest the increase in the tax on new cars that came in then has a fair to lot to do with car sales declines?
Maybe
But not as much as Brecit and a decline in consumer confidence I would suggest
Yeah. Mines on the way out. I’m planning to sell it and buy a pedal cycle. I’m not expecting a lot of change !
The BOE tightening credit will albeit indirectly have a knock on effect to ‘consumer confidence’ but having debt fuelled growth is not particularly desireable so perhaps a necessary evil. This country country needs to bring back a manufacturing renaissance but I dont see that happening with labour or the tories given they both support things that make it hard for the little manufacturing we do have.
Sam’
We’re not going to see a manufacturing renaissance whatever either party wants.
And why bother. ? There’s a perfectly good manufacturing centre in China (and other parts of Asia) which is capable of out-producing demand. They have a reputation for producing crap, but that’s only because that’s what buyers ask for; and lets face it most of what comes to us with familiar branding was made out there anyway. They will produce anything required to the standard required and there is no way we are going to go head to head there without the sort of protectionism that we all supposedly despise.
What this country needs is to address the problem of what the hell do you do with a workforce if you can’t supply ‘jobs’. Industry needs ‘hands’ like the Army needs yobbos. They don’t.
So we need to be thinking out some creative solutions that get what needs to be done, done; and there’s no shortage of that. There’s never a shortage of things that need doing only an unwillingness to pay for it to be done.
That’s why we need to be working out how to introduce UBI schemes. About fifty percent of people working in this country are doing work to no useful purpose. They shove digital paper about the place and make themselves and everyone else miserable.
You don’t go back.
You can’t go back. It’s not an option.
The fact that at least 40% of those cars have diesel engines (where secondhand prices are falling most rapidly) means these losses could be very significant.
So, does this mean it is a good time to be looking for a new or secondhand car, or should one wait a few months for the bottom to fall out of the market?
I’d wait
MOT ’til Jul ’18. Good tyres all round. (?)
Washed and valeted (?)
I can’t get my sales pitch past you can I ? Eagle eyes. 🙂
No advertising on this site!
According to the Bank of England, 70% of new care leases in the UK are financed by the automakers themselves. A collapse in used car values would seem to be a much bigger problem for the automakers than the banks.
Indeed, most of the financing raised by Automakers to provide these deals will have come from capital markets, so it would be the holders of those debts on the hook, not the banks, who themselves have much tighter capital requirement legislation governing the debt they now hold.
With all due respect, you appear to be behind the curve a little if you believe that this is primarily a banking problem.
But much of that debt is is jettisonable subsidiaries which passes the risk back to banking
I do not doubt that the car companies are on the line
But to say that their funders are not is a bit like saying that those who funded front of house mortgage lenders has not risk from their CDOs, etc, in 2008
I’m failing to make the connection between ‘jettisonable subsidiaries’ who have financed their operations by issuing debt into capital markets, and the banks ? (the banks being negligible holders of these instruments following the implementation of new capital requirements which require too much provision to make the bonds worth holding).
The ‘funders’ you refer to are not the banks, but holders of the debts the Auto financing arms have issued in the market.
Bank’s did indeed finance the lenders whose debts were re-packaged into CLO’s / CDO’s, which is why, indirectly, they were on the hook for those instruments, so you are correct in the latter assumption, but not the first I’m afraid.
You may persist if you wish in thinking debt and banks unrelated
I think you might find the automakers are heavily reliant on the banks. Up to their ocksters indeed.
‘But much of that debt is is jettisonable subsidiaries which passes the risk back to banking’
How straightforward is the trail of loan and debt in the case of car leases and car sales? Is it likely that a proportion of this debt has been rolled up and attractively packaged and likely to bite someone on the bum as we saw with sub-prime?
“I doubt this will be the start of another financial crisis.”
It’s never gone away. Since the 1980s debt is what keeps Capitalism afloat. In order to maintain requisite levels of growth, the wizards of Wall St and the Square Mile will forever invent new sugar-coated schemes with which to lure addictive consumers. For the rentiers (and neo-liberal governments) its seen as a virtuous circle. For the remaining 99% of society (and the planet) it’s inescapable penury, until it’s superceded by a new sustainable economic order. And my guess is that’s not going to happen any time soon. Barista – un caffè doppio, grazie!
We have a good view of the car park. In recent years it has been remarkable in not only the number of new cars coming and going but their size and cost. I doubt it is because suddenly a lot of people have got rich. What I think, given the figures, is that a good many people are borrowing/leading/renting etc. on complex schemes that look good when you are talking to the salesman but not so good if you are wise enough or capable of running and calculating the figures. Another reason is the property price effect, suddenly people have the equity to borrow more and men being men get a bigger motor. Sooner or later this four wheeled ponzi caper was going to hit the bollards. As a result it is possible that we shall all be the poorer.
But maybe, just maybe, the environment will win in the end
In the long term the environment will win out.
The popular green slogan about saving the planet is misdirected. The planet will survive as it has for eons, the moot question is whether, or for how long, humanity will survive.
In the shorter term the sort of green initiatives which have been pooh-poohed by those of the Lawsonian disposition as unnecessary are already becoming, and will continue to be, the financially viable way forward.
The purblind Cameron/Osborne team failed totally to grasp that green investment was the way to drag the economy out of the 2008 debacle rather than an unacceptable additional burden on business.
In my family there is the old saying that ‘You cannot legislate for stupidity’. Somehow people keep voting for it though.
Richard, I thought it was the case that the vast majority of PCPs were issued by the car manufacturers through their financing arms rather than by banks. It is worrying that these finance companies are not regulated. But it is not really a problem for banks as yet. At least, this is my understanding. I am sure you will put me right in your usual way
There is no doubt that the financing arms of car companies are exposed
But I think you will find many are little more than a front for banks
Look folks – the main issue is as Richard has indicated – it is about debt fuelled consumption.
The continuing erosion of wages by the job market – wages used to pay off those debts creates the need for further debt to keep up. So debts erode income too. It’s a farce. Debts that cannot be paid will not be paid.
We need to do what Henry Ford apparently did – pay people enough to be able to afford a car and pay for it with REAL money. All these finance deals do is suck value out of the transaction for the middleman debt issuer.
We are treating the purchase of cars like the purchase of houses.
It’s as if we haven’t learnt a damn thing.
We haven’t learned a damn thing
Everything that can be is being finacialised
That is the lesson we need to unlearn
Interesting how often people will tell you they are going to ‘invest’ in a new car.
It isn’t even a rational speculation (unless you are looking at an elite classic rarity)
Powerful tools, words. And in careless hands, like all powerful tools, they can wreak serious damage.
I agree with PSM. The final solution to the debt problem is for the State to find a mechanism to prohibit people from buying things they desire, unless they have managed to save cash in their bank account to afford the purchase. (I am aware Richard is not keen on people accumulating ‘useless’ cash savings, but perhaps in this instance the saver could account to the State for the reason).
This also seems to fit quite well with Richard’s suggestion that the State be granted access to people’s banks accounts to ensure that they are paying the correct amount of tax at the correct time, so effectively it would mean that the State could pre-check on the ability to afford consumption.
This would be the end of appeasement of the city and its debt machine.
Truly the Courageous State in action.
It would be the end of functioning bank accounts too for many people, and a big rise in demand for cash and cash transactions of the ‘no questions asked’ variety.
?
Bill Kruse says:
“…It would be the end of functioning bank accounts too for many people, and a big rise in demand for cash and cash transactions of the ‘no questions asked’ variety…..”
A) Without bank accounts nothing will function, because….
B) …..when the excrement hits the extractor there ain’t gonna be no cash. It’ll all be digital with plastic access. Because governments are not going to allow for ‘no questions asked’ finance.
You may be able to do some barter, but did you notice how quickly the old pound coin went out of circulation. BTW ? There must be literally tonnes of them in whiskey bottles all over the land.
Either you aren’t paying attention to what is going on, or you just don’t believe it.
Apart from any thing else coins are too expensive to make. It’s many years since an industrial steel washer became more expensive than a penny piece.
I’m aware of the war on cash – didn’t work too well in India, did it? – and refer you to Worgl, the Bristol Pound, Qoin etc.
Has it failed in India?
I think that one is still open to question: it depends on how hard they pursue the cash that was deposited as to source
What is true is that it could have been better managed, without doubt
And today, there’s this https://www.shareable.net/blog/the-english-city-with-its-own-cryptocurrency-a-qa-with-the-hullcoin-team which I pass along for general interest.
And how are they ensuring it’s taxed?
I don’t believe they are, should they? If the principal function of tax is to stop inflation then there seems to be no obvious need in this instance.
But the transactions in the currency must be capable of being taxed
How does that happen?
When you say it must be capable of being taxed, is that because it’s a legal requirement of some kind? There must always be transaction tax even if the transaction currency isn’t specified in law? I confess I have no idea if it is or isn’t specified at all. Anyway, if that’s what you’re after, I’ll try to find out.
Taxable transactions can take place in any currency
The Bristol pound translates at par to sterling making recording for tax easy
How does the Hull currency do this?
We may find explanation here from this 2014 article on the Hull cryptocurrency; “The way in which the Hull City Council team plans to make use of HullCoin is through a ‘time banking’ type of scheme. Hull residents in financial distress can take part in voluntary activities and receive HullCoins in exchange. Kathryn Sowerby, Hull City Council’s Social Policy Officer, confirmed to me that receipt of HullCoins will not affect people’s benefits because cryptocurrencies are not yet recognised as actual currency in UK law, or in the eyes of the Department of Works and Pensions (DWP).” So, I’m hazarding, if it’s not a currency in the eyes of the law, then no transaction has taken place which, in the eyes of the law, would need taxing. Make sense?
Nonsense
Barter is taxable
On that basis so is this
Does cryptocurrency have a status in law? If not, which might be the suggestion, then no barter has taken place.
Of course it has
It has been recorded
Anyone relying on the advice from thus scheme needs better advice
They say (I asked); “HullCoin is not taxable it is only exchanged discounts. Similar to corporate loyalty points.” (from Twitter).
I’m reminded here of colonial scrip, of the Yap stones, of Worgl, and wonder if we might not be looking at a national Boston Tea Party of this catches on nationally, bringing with it prosperity, and then the government, with its usual ham-fistedness, tries to stamp it out.
But it’s not discounts
It’s services
Cash is king but nobody wants it ….
https://www.theguardian.com/money/blog/2017/jul/08/cheap-car-loans-financial-crash-consumer-credit-explosion
“In the case of car finance, it’s not banks that are most exposed but the financing arms of the manufacturers, which, because they are not deposit takers, are treated differently by regulators.”
However they borrow on the wholesale market and through issuing debt, even be it asset backed there will be a knock on effect to other financial institutions be they banks or investment companies…..interesting to see what the rating agencies say , if they still have any credence ?
In our village and surrounding ‘fairly affluent’ area there a lot of new large cars particularly 4x4s, many households having more than one all of which have been purchased on finance. However as long as you are in paid employment and can afford the repayments the merry-go-round will continue be it at a slower pace but look out for any signs of unemployment or woe betide the threat of higher interest rates ,though for all their talk the old lady daren’t contemplate much of a rise at all…
It is a volatile industry, there is a lot of money invested in the auto sector , they are big employers, there is over capacity, car sales are orientated to the finance options , few want cash buyers ….and the future -how to keep churning them out, diesels will be on the way out and the arrival of electric era ,plenty of issues out there for the auto sector.
First they came for the diesels……..
Petrol will not be far behind.
As for electric….have a read:
https://www.cleanenergynews.co.uk/news/transport/all-electric-vehicle-chargers-sold-in-the-uk-to-be-smart-under-government-p
So you plug it in…and the smart-charger does nothing…grid load is high and demand-side-planning decides there is no available capacity.
Other minor problems; household supplies, from the grid, are fused at 100A.
Fast chargers will exceed this.
Even standard chargers will need the house wiring altered to allow a charge point, the only house wiring rated at anywhere near the standard charge rate (3.7KW) or (7.0KW) is the kitchen cooker socket.
The fast charge rate of 22KW is near the rated maximum for houses.
All come with attached problems for the grid…hence the requirement that ALL electric car chargers have to be “smart”.
I found today, while doing a bit of late season weeding, that my thoughts ranged into realms where I have no data readily available to come to sensible conclusions.
Perhaps there are geeks present who know some of the answers:
Given that is widely predicted/expected that Mark Carney and the MPC might be on the verge of doubling the BofE base interest rate I wondered if this has ever been done before in a single step. And if so what happened next.?
I think perspective needs to be added to your observation
It’s still a quarter point
And base rate is not the same as most charged rates
John D says:
October 24 2017 at 12:09 pm
“I doubt this will be the start of another financial crisis.” – Perhaps not, but it’ll have to do ’til the real thing comes along. 🙂
“…..until it’s superceded by a new sustainable economic order. And my guess is that’s not going to happen any time soon. Barista — un caffè doppio, grazie!”
I’ll join you, John, but make mine a single espresso. I’d hate to have any of it go to waste because I hadn’t the time to finish it 🙂
There is a deeply ingrained belief that unless you ‘ own ‘ a car it isn’t really yours. I have been renting cars for ten years ; it’s called ‘ contract hire ‘ and that’s precisely what it is the car arrives and two, three, or four years later the car goes back and you start again. There are no hidden costs . It’s simple , it’s a piece of cashflow. PCP is a wholly different matter because it plays to the psychology of ‘ ownership ‘ . Having said that my hire company recently offered me another year on my contract at a substantial discount so I began to think that given my car is a diesel and we all know what’s going to happen there there is some sort of shift taking place in the car market , not to mention the rise and rise of electric
cars …….it’s not a simple linear matter i.e. cars sales are falling which spells a crash across the board.
The thing is that there is no way on God’s earth that an ordinary household (median disposable income 2016 =£26,300) can possibly afford to buy a brand new car *without* debt.
The most popular UK model is the Ford Fiesta – a modest hatchback – which ranges from £12,715 to £21,225 (2017 prices).
Even the cheapest model uses up half (!) a median household’s annual post-tax income – this is unfeasible. The problem is that, if new cars were to remain solely the preserve of the wealthy, their numbers are insufficient to support a mass car industry.
Ultimately, the future will have to be in Zip-car style pay-by use, self-driven or otherwise – at least in urban situations.
Anyway, paying tens of thousands of pounds for a rapidly depreciating ton of metal, which spends most of its time sitting idle in front of your house or workplace seems like a spectacularly dumb and expensive vanity project – and even dumber at interest!
I don’t buy new cars
Why does anyone?
There are incredible value second hand cars available
Of course, but the car industry has to have buyers for its new products and now it would seem all those purchases are not by private individuals, nor even by companies – as in ‘ company cars ‘ – but buy leases , PCP, or contract hire anything in fact other than someone shelling out hard cash; in other words debt of one sort , or another. And, as we keep telling ourselves on this blog, at some point this jig is going to be up.
They used to call it ‘The Never Never’
People buy new cars because autodealers sell finance that looks affordable. It is affordable (even if not sensible) to people with a regular income.
‘Nobody’ owns cars these days. Ever. They never get paid for. Unless you buy them second hand.
(Green metallic, slight scratch on nearside rear door) 🙂
I’m sure there are also incredible value second hand suits as well.
What car do you drive, Richard? They say you can tell much about a man from the car he drives.
The reason the “Model T” Ford ceased production was the rise of the second-hand car market in the US. The Model T was cheap, and there were few cars to buy; 16+ million were sold. By around 1927 they could not compete with the second-hand cars now available. GM took over from Ford as “number 1”, with the brilliant Alfred P Sloan’s new concept for the next hundred+ years of consumerism: “a car for every purse and purpose”.
What is even more worrying is the negative equity when the deal rolls over (assuming the deal does rollover). Looks eerily like the Housing Bubble Lite. When there one profit warning there’s normally more to come.
And what will it do to the market for steel? There are going to be heaps of the stuff.
For the record, a Volvo V70
http://uk.businessinsider.com/statistics-uk-bank-exposure-pcp-car-finance-debt-2017-7
Thanks
If you want to visit scary…
Look at the nation going to all-electric….
20 million cars charging every night….
Each consuming 7KW/Hr on slow charge.
That’ll throw the off-peak usage figures, and the cost, out of the window.
Need a few more power plants, or several thousand wind turbines…
On fast charge, over 40 KW (which most houses will not be able to meet anyway)
John M
You make it all sound as if it’s some sort of insoluble problem.
If you really want to visit scary, let’s just keep on doing it the way do now.
Andy,
Misconceptions abound there.
1.” the sort of protectionism that we all supposedly despise”
Yes? What sort is that and what other sorts might there be? If I were to suggest that imports be sustainably sourced, not from come sweatshop slave factories, mercantilist currency manipilators or at the very least be manufactured under the same sort of standards that apply to local producers, would we despise that as well?
2. “There’s a perfectly good manufacturing centre in China (and other parts of Asia)”
Are Germany and Sweden another part of Asia?
3. ” Industry needs ‘hands’ like the Army needs yobbos”.
I’m not sure what that means but if its a reference to the near complete automation of manufacturing that is partly irrelevant because it has long been the case that most of the jobs are in auxiliary industries: manufacturer’s suppliers – components and other supplies, design and engineering, transport (in and outbound), distribution etc.
4. “And why bother?”
See points 1 & 3 above, then consider that unnecessary import reliance is a relentless drain on the balance of payments and a source of strategic vulnerability.
5. “a..manufacturing centre in China (and other parts of Asia) which is capable of out-producing demand”
Yes, we’re all capable of outproducing demand. All industrialised countries are now relegated to permanent excess capacity but that’s not an argument for locating production elsewhere.
6. “we need to be working out how to introduce UBI schemes”
UBI is all well and good but in aggregate demand terms it is no substitute for a fully paid, fully employed workforce.
7. “You don’t go back. You can’t go back. It’s not an option.”
That seems to combine “there is no alternative” with the modernist myth of linear progress. History suggests that progress is cyclical not linear and as far as I can tell neo-liberalism is (was?) little more than an ultimately doomed, reactionary attempt at reviving laissez-faire rules that preceded the Great Depression. That was combined with 19th century colonialism under the updated guise of race-to-the-bottom “free” trade. At any rate the upside to the decline of local manufacturing to date is that new, emerging manufacturers get to start with a clean slate and new technologies.
As with many people, the realised and potential implications of advances in areas such as 3-D printing have not as yet occurred to you. It is already the case in certain areas that a run of 1000 component parts can be produced just at the same per-unit cost as a run of 1 million, and making them locally is just cheap as sourcing them anywhere else. Looking forward, the implication there may be that mass production economies of scale (and therefore, globalisation) are becoming slowly but increasingly redundant and may ultimately become nothing more than a passing phase in the history of the industrial revolution.
It seems that in haste I have typed that as a straight comment, It was meant to be a reply to Andy Crow’s reply to Sam.
Thanks Marco
I am not sure if this is a comment or a reply (or to whom it is a reply), but this thread has produced a rich and fascinating variety of themes, twists and turns (none of which seemed quite to reach a satisfactory or satisfying conclusion).
I was struck by the reference to CLOs and CDOs earlier, and the conundrums of debts and banks (and I take the point also made that we are moving to a cashless society, or rather we are being quietly herded there, by the Government and the Banks – that is an aside). The concern I have comes from ‘left-field’; what precisely is the difference between insurance and banking? I ask only because I think the two have become conflated in a trend that developed before the 2007-8 crash; at least that is my surmise.
I agree: these boundaries are decidedly fluid
From a purely personal PoV based on my observations of the car population where I live (Hertfordshire), which has a reasonable cross section of society, there are those who are want shiny new cars and have probably taken out some type of loan to get them, and those (like myself) who have older cars paid for by cash which they will run for years before replacing with more of the same.
My 2002 Skoda diesel has done about 140,000 miles, but such is it’s build quality and relatively low running costs that I can’t see myself getting rid of it in the foreseeable future. The same can be probably be said of many of the other older cars I see in my area.
I’m sure that a combination of a faltering economy (Brexit), anti diesel sentiment and unwise lending for PCP’s is going to cause severe problems to the car industry and will flood the second hand car market with stock.
Another problem caused by our crazy debt fuelled type of capitalism.
Agree with all that
I tend to run cars for more than ten years
And why not? They work reliably for at least that long now
I am rather hoping my Volvo goes for longer than that
The build quality of modern cars is such that, with appropriate maintenance, they will go on for at least 10 years, so I see no point in changing one unless I am forced to by some kind of regulatory edict e.g my car’s emissions are deemed illegal.
Otherwise, a new car is simply a pointless ego trip, especially if funded by a PCP.
So now we know it: those with good sense on tax also have good sense on cars
Kia. Seven years (only just out of warranty!). Circa 90k miles; but obviously just a baby around here ….
I considered it
Longevity was the aim
A friend managed 13 years reliable service from one
This must be petrolhead corner.
Best car I had was a Volvo 240 estate which had 130,000 on the clock…..when I bought it.
It ran for five years often heavily laden and when I traded it in at just shy of 250,000 somebody else kept it going. It needed new alternator brushes once – exhaust pipe and tyres. Apart form that trouble free. It was, however, rather fond of petrol and never did more than 26 miles to the gallon, or indeed much less.
Sadly they don’t make ’em like that any more. Not sure I’ve ever bought a car less than ten years old. Probably won’t ever buy another of any type again. (Anyone interested in Toyota Corolla is too late) 🙂
I had a Kia. A Rio. I hated it.