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Lease Sales Boosting Us Car "sale" Numbers

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http://www.zerohedge.com/news/2014-08-06/mystery-behind-strong-auto-sales-soaring-car-leases

When it comes to signs of a US "recovery" nothing has been hyped up more than US auto companies reporting improving, in fact soaring, monthly car sales. On the surface this would be great news: with an aging car fleet, US consumers are surely eager to get in the latest and greatest product offering by your favorite bailed out car maker (at least until the recall comes). The only missing link has been consumer disposable income. So with car sales through the roof, the US consumer must be alive and well, right? Wrong, because there is one problem: it is car "sales" not sales. As the chart below from Bank of America proves, virtually all the growth in the US automotive sector in recent years has been the result of a near record surge in car leasing (where as we know subprime rules, so one's credit rating is no longer an issue) not outright buying.

From BofA:

Leasing soars
: Household outlays on leasing are booming at a 20% yoy pace - a clear sign that demand for vehicles is alive and kicking. With average lease payments lower than typical monthly ownership costs and with a down-payment not typically required to enter into a lease, the surge in vehicle leasing is likely a sign that financial restraints are still holding back some would-be buyers. Thus, as the economy improves, bottled-up household demand for vehicles could translate to higher sales.

Chart 1: Households go for the low capital option: leasing soars

(yoy growth rate, inflation-adjusted)

car%20leasing.jpg

It could also translate into even higher leases, which in turn bottlenecks real, actual sales.

Of course, the problem is that leasing isn't buying at all. It is renting, usually for a period of about 3 years. Which means that at the end of said period, an avalanche of cars is returned to the dealer and thus carmaker, who then has to dump it in the market at liquidation prices, which in turn skews the ROA calculation massively. However, what it does do is give the impression that there is a surge in activity here and now... all the expense of a massive inventory writedowns three years from now.

Who needs to own anything you can lease everything and it's a never ending payment option....

Cars have become too expensive and the only way to afford one is not to buy one but rent it from the car manufacturer.

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http://www.zerohedge.com/news/2014-08-06/mystery-behind-strong-auto-sales-soaring-car-leases

Who needs to own anything you can lease everything and it's a never ending payment option....

Cars have become too expensive and the only way to afford one is not to buy one but rent it from the car manufacturer.

Yep agree.....I think new car "sales" in the UK might be a bigger bubble than UK housing, I'm serious.

Both markets only exist due to easy money. But at least with a house people generally put a material down-payment which keeps people a little bit more in tune with what they can afford and need. (I use afford and need in loose terms of course).

Also, with a car, no-one needs a 40 grand BMW when a 15 grand Korean motor or a 20 grand 2 year old BMW motor will do; but people rarely spend 2x more on a house than they need to....

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Yep agree.....I think new car "sales" in the UK might be a bigger bubble than UK housing, I'm serious.

Both markets only exist due to easy money. But at least with a house people generally put a material down-payment which keeps people a little bit more in tune with what they can afford and need. (I use afford and need in loose terms of course).

Also, with a car, no-one needs a 40 grand BMW when a 15 grand Korean motor or a 20 grand 2 year old BMW motor will do; but people rarely spend 2x more on a house than they need to....

Rarely? Really. Everyone buying in London is doing just that!

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Why lease a car when you can pick up a perfectly good second hand car for a grand or less

To impress the neighbours.

For the reassurance of three years hassle free motoring.

Because you are taken in by the low monthly figure of PCP ("perpetual car prison"), and don't give a second thought to the GFV ("go find vaseline")

If you look at a lot of car adverts now, it's all about the monthly payments and it can be quite hard to find out how much the thing actually costs.

If you are the sort of person who buys a new car every three years then part exchanges it for another new car from the same manufacturer (i.e. quite mad) then leasing a car makes sense. For everyone else however...

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If you look at a lot of car adverts now, it's all about the monthly payments and it can be quite hard to find out how much the thing actually costs.

It's the same with housing and I think I said in 2008 this was something that helped lead to the crash.

People just want a life style they are told they can afford, meanwhile the execs, business owners and sales people are the ones with the decent lifestyle.

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the reason i wanted to change my car is running cost.

current petrol car 42mpg £175 road tax spend £40 around week on fuel £2000 a year!!!!!

newer low millage diesel car 65mpg £30 road tax . around a third more millage saves around £650 a year

total saving around £800 year and newer and maybe more reilable car 3 year old car instead of 9 year old

If i did buy i think in around 6 years i would have broke even by money saved and the then current value of the diesel car

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the reason i wanted to change my car is running cost.

current petrol car 42mpg £175 road tax spend £40 around week on fuel £2000 a year!!!!!

newer low millage diesel car 65mpg £30 road tax . around a third more millage saves around £650 a year

total saving around £800 year and newer and maybe more reilable car 3 year old car instead of 9 year old

If i did buy i think in around 6 years i would have broke even by money saved and the then current value of the diesel car

Almost identical figures for wife's car (and reason for change). The old car was perfectly serviceable and reliable, although at any time just one or two bills could have dented that situation, more likely with age. A miley but realible replacement cost £2500 (5 year old car) for the switch (old car getting chopped at auction). Very similar figures so the upgrade cost is nominally cleared by savings in 3 years. Moreover, more incentive to switch driving use to wife's car whenever possible to save further on the fuel front.

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the reason i wanted to change my car is running cost.

current petrol car 42mpg £175 road tax spend £40 around week on fuel £2000 a year!!!!!

newer low millage diesel car 65mpg £30 road tax . around a third more millage saves around £650 a year

total saving around £800 year and newer and maybe more reilable car 3 year old car instead of 9 year old

If i did buy i think in around 6 years i would have broke even by money saved and the then current value of the diesel car

It's insane really that the argument for buying a new car is now the tax arbitrage.

As with all tax arbitrage created by the govt. of course, you're bearing the risk of their policy change.

If they decide to lower the emission band thresholds, or implement a surcharge or change the fuel duty levy etc then you're stuck with a capital investment you can't shift without taking a massive loss. (Anyone who remembers what happened to hot hatch insurance premia in the 1980s will know what I'm talking about!)

Which, I suspect, is one argument why leasing can make sense. You're shifting the risk back onto the manufacturer/supplier. Given the certainty that taxes will have to rise post-election, coupled with the rapid tech development in electric vehicles, anyone sinking their capital into a new car, especially an expensive German one, looks incrasingly like the patsy.

Edited by R K

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It's insane really that the argument for buying a new car is now the tax arbitrage.

As with all tax arbitrage created by the govt. of course, you're bearing the risk of their policy change.

If they decide to lower the emission band thresholds, or implement a surcharge or change the fuel duty levy etc then you're stuck with a capital investment you can't shift without taking a massive loss. (Anyone who remembers what happened to hot hatch insurance premia in the 1980s will know what I'm talking about!)

Which, I suspect, is one argument why leasing can make sense. You're shifting the risk back onto the manufacturer/supplier. Given the certainty that taxes will have to rise post-election, coupled with the rapid tech development in electric vehicles, anyone sinking their capital into a new car, especially an expensive German one, looks incrasingly like the patsy.

True, but the government are making most major purchases in life a gamble. One way or another though (and leasing does seem remarkably cheap compared to purchase cost) you will be stumping up for the depreciation in early car life, the op and my situation is accounting for purchase cost AND running cost of a sensible s/h purchase.

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An industry presentation from 'Invigors' I saw from February identified a glut of PCP returns as a key risk to the UK car market.

Private car sales in 2013 accounted for 47% of all new car sales, 75% of those those private sales involved finance, and 70% of the finance deals were PCPs.

Therefore 25% of the new private sales involve a PCP.

PCP deals really took off in 2012 after a few static years. 2013 showed strong growth and 2014 is expected to show even more, in number and proportion of finance (the other routes seem to have remained static in value terms, so it may be sensible to say that PCP is allowing additional car sales to people who would not have bought one via HP or a loan, or leased.)

http://imgur.com/9XaD6Dy

If the PCP holder don't have the money to buy the car at the end of the deal, the car will be sold as used. PCP deals typically seem to be arranged over a period of 2-4 years, and used sales in the UK in Q1 2014 rose 5.9% y-o-y (data is from early June). I'll try and watch this trend to see if the rampup in PCP deals in 2012/13 is reflected in used sales going forward.

http://www.smmt.co.uk/wp-content/uploads/sites/2/Q1-2014.jpg

http://www.smmt.co.uk/2014/06/used-car-sales-q1-2014/

Used values could/should suffer if the PCP glut materialises. PPI refunds seem to have helped pump up prices at all levels recently, PCP deals being tailored to suit they typical refund of £2,500, and of course that sum will also go a long way to getting a used car too. FCA data on PPI refunds is here:

http://www.fca.org.uk/consumers/financial-services-products/insurance/payment-protection-insurance/ppi-compensation-refunds

weaker than 2013 so far in 2014 (2014 data up to and including May).

On present trends 2015/16/17 might be a good time to be in the used car market if PPI refunds have waned significantly and PCP returns are large.

edit can't insert an image, sorry, click on the link instead.

edi2 clarity/PPI link

Edited by Joan of The Tower

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It's sometimes hard to find out the cash price of a new UK car. All the ads state a monthly figure, either lease or HP, sometimes obfuscated by a six month starter rate.

This is so true.

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It's sometimes hard to find out the cash price of a new UK car. All the ads state a monthly figure, either lease or HP, sometimes obfuscated by a six month starter rate.

Not only that, but also from the ads it is also difficult to find out any of the features/ benefits of the cars being sold, except for the headline monthly financed / lease price.

If that is all the manufacturers (top brands at that too, supposedly) have to say about their cars then I assume the worst and the least money spent overall the better, certainly no reason to splash out on anything new!

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It's insane really that the argument for buying a new car is now the tax arbitrage.

As with all tax arbitrage created by the govt. of course, you're bearing the risk of their policy change.

If they decide to lower the emission band thresholds, or implement a surcharge or change the fuel duty levy etc then you're stuck with a capital investment you can't shift without taking a massive loss. (Anyone who remembers what happened to hot hatch insurance premia in the 1980s will know what I'm talking about!)

Which, I suspect, is one argument why leasing can make sense. You're shifting the risk back onto the manufacturer/supplier. Given the certainty that taxes will have to rise post-election, coupled with the rapid tech development in electric vehicles, anyone sinking their capital into a new car, especially an expensive German one, looks incrasingly like the patsy.

I have not changed my car yet but it is worry as they have all ready siad the ywill charge deisel cars more to go in to london. but as the other poster said , its a gamble there comes a point where the gamble the odds you think maybe are in your favour.

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I suppose it may be worth considering holding off for a couple of years- if the PCP returns 'timebomb' (the exact word from the industry presentation) comes to pass then recent strength (since scrappage/PPI) in used values could weaken considerably. All depends on your needs etc though of course in the meantime.

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Why lease a car when you can pick up a perfectly good second hand car for a grand or less

Not in many (most?) parts of North America. To get under a thousand pounds here, you're probably looking at a twenty-year-old car, not a ten-year-old.

One reason people lease here is because the cost is so low, because depreciation is low compared to the UK. I was thinking about it myself, because, for not much more than the cost of buying a new car spread over ten years, I could just lease a new one every two or three.

Edit: oh, yeah, and the car we eventually bought costs about 50% more in the UK than it does here.

Edited by MarkG

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