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Saving For a Space Ship

UK car business has 'exactly the same problems' as mortgage market 10 yrs ago

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I posted this article on the long running hpc pcp thread,

BoE investigates 'terrifying' rise in borrowing to fund new car purchases  

but thought it deserved its own thread, due to its' direct comparison to the last mortgage crunch

The UK car business has 'exactly the same problems' as the mortgage market 10 years ago ...  

(turn adblock off to read) 

http://uk.businessinsider.com/uk-car-finance-pcp-mortgage-market-morgan-stanley-2017-7

Quote

...He believes the current state of car credit in the UK — £41 billion ($54 billion) in loans last year — is unsustainable.

The reason: car finance companies are allowing drivers to buy vehicles using a consumer debt product which requires car dealerships to take cars back if their owners decide they don't want them anymore. Almost all the risk in these transactions is carried by the car finance company, not the consumer. There is virtually no other consumer credit product which allows borrowers to simply walk away from an asset unpenalized if they don't want to pay for it anymore.

The scenario — of cash-strapped consumers handing back their keys with almost no downside — might bring back memories of the 2008 housing crash in the US, and a concept called "jingle-mail."

In the depths of that recession, mortgage bankers experienced an avalanche of envelopes from former customers that jingled when they were delivered. American homeowners who couldn't afford their mortgage payments and couldn't sell their houses simply mailed their house keys back to the bank and walked away. The houses then became the bank's problem...

..This has never been tested in a recessionary market

There is an obvious problem with all of this: It only works as long as the dealer/finance company has correctly estimated the second-hand value of the car three years from now. If the market heads south — due to a recession, an unexpected glut of used vehicles, or Brexit — and the market values are less than the GFMV, then everyone is in trouble. Drivers are left owing more than their cars are worth; dealers are likely to get stuck with cars whose value is less than the price they need to make a profit...

 

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59 minutes ago, Saving For a Space Ship said:

I posted this article on the long running hpc pcp thread,

BoE investigates 'terrifying' rise in borrowing to fund new car purchases  

This assumes there isn't already a significant percentage of markup in the original list price factored in.

Materials / Energy are cheap now are not they ?    Product line technology has got ever more efficient ?  Fewer man hours in the construction of a car, better utilization of staff, more robots, less wastage, global supply chain for cheaper parts.

Lets wait for the 2nd hand price to start collapsing first ?  Maybe that is the matter that needs its own thread, "2nd hand car price watch" ?

Do the UK agreements really allow jingle mail before the end of the 2/3/4 year PCP ?   Aren't distressed defaulters a profit centre ?  Car in better condition/low millage, finance company able to charge lots of extra fees to the distressed person to resolve the process, able to claw that back over a large period of time (unless they decide to go bankrupt?) possibly taking other assets / equity off that person ?

 

 

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This is the first salvo of the next big crisis. The big hit will be interest only mortgages. 

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4 hours ago, stuckmojo said:

This is the first salvo of the next big crisis. The big hit will be interest only mortgages. 

Makes you wonder that. Many claim that though the PCP market now covers over eighty percent of new car registrations it represents only a tiny amount compared to the mortgage market I believe the losses would be of consequence. Those losses would crystallize at a time when every other liability does helping to add velocity to a sliding market. It is that that is the risk not the amount. In the UK dealers have maxed this out and this product it about to be tested in the real world, lets see how well written this is.

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Surely not, car dealers and finance companies are upstanding moral entities and would surely never abuse a barely regulated flaky financial product to breaking point for short term gain?

Edited by Si1

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Its not PCP. This mess is just obvious as its so noticable in terms of debt and new cars on the road.

Its unsecured credit, which is less obvious.

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53 minutes ago, TheCountOfNowhere said:

I've got news for you

 

UK mortgage business has 'exactly the same problems' as mortgage market 10 yrs ag

My first thoughts when reading the thread title... "When did the problems in the mortgage market 10 years ago get resolved?"... they didn't.

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the amount of people buzzing around in those tiny little bmw/audi/mercs is unreal, zipping about the place in a mini metro with a badge on it thinking they are the don. since when did slapping a badge on a wheelbarrow = status? I'm perpetually perplexed out on the roads

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The American position:

 

Crashing Auto Sales Reflect Onset Of Debt Armageddon

July auto sales was a blood-bath for U.S auto makers.  The SAAR (Seasonally ManipulatedAdjusted Annualized Rate) metric – aka “statistical vomit” –  presented a slight increase for July over June (16.7 SAAR vs 16.5 SAAR).   But the statisticians can’t hide the truth.  GM’s total sales plunged 15% YoY vs an 8% decline expected.  Ford’s sales were down 7.4% vs an expected 5.5% drop.   Chrysler’s sales dropped 10.5% vs. -6.1% expected.  In aggregate, including foreign-manufactured vehicles, sales were down 7% YoY.

Untitled1.png?resize=604%2C206

http://investmentresearchdynamics.com/crashing-auto-sales-reflects-onset-of-debt-armageddon/

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I can see bailouts for whatever big financial organisations were backstopping these loans but if credit is suitably tightened on car finance, the dealerships are screwed as so many of their new car sales depend on cheap and easy credit.

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54 minutes ago, Errol said:

The American position:

 

Crashing Auto Sales Reflect Onset Of Debt Armageddon

July auto sales was a blood-bath for U.S auto makers.  The SAAR (Seasonally ManipulatedAdjusted Annualized Rate) metric – aka “statistical vomit” –  presented a slight increase for July over June (16.7 SAAR vs 16.5 SAAR).   But the statisticians can’t hide the truth.  GM’s total sales plunged 15% YoY vs an 8% decline expected.  Ford’s sales were down 7.4% vs an expected 5.5% drop.   Chrysler’s sales dropped 10.5% vs. -6.1% expected.  In aggregate, including foreign-manufactured vehicles, sales were down 7% YoY.

Untitled1.png?resize=604%2C206

http://investmentresearchdynamics.com/crashing-auto-sales-reflects-onset-of-debt-armageddon/

I track this along with mall foot traffic and restaurant sales.There is usually a lag,but all three are going down fast,very fast.

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I read the article no problem with adblocker (Adaway on Android 6 and Yandex browser.)  

My car-obsessed and penniless son has just signed up for an expensive lease car. I read his small print and if he wants out of the agreement before the end of the three years it is possible but you're fined 3 months payments. So you can't just hand it back because you are bored with it. I guess the article means what if people lose their jobs and hard default unable to pay anything. 

I doubt whether a 40 thousand pound car is genuinely worth that amount.  That's where I think the number fudging is happening. 

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2 hours ago, thewig said:

the amount of people buzzing around in those tiny little bmw/audi/mercs is unreal, zipping about the place in a mini metro with a badge on it thinking they are the don. since when did slapping a badge on a wheelbarrow = status? I'm perpetually perplexed out on the roads

I think some of it is trying to keep up with the peers hence it cascades so if an ordinary person feels the need to keep up they can only keep up with the PCP model. I've heard of ridiculous stories of people's desire to raise a deposit to get in. All they see is other people driving Mercs, Audis.

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5 hours ago, Errol said:

The American position:

 

Crashing Auto Sales Reflect Onset Of Debt Armageddon

July auto sales was a blood-bath for U.S auto makers.  The SAAR (Seasonally ManipulatedAdjusted Annualized Rate) metric – aka “statistical vomit” –  presented a slight increase for July over June (16.7 SAAR vs 16.5 SAAR).   But the statisticians can’t hide the truth.  GM’s total sales plunged 15% YoY vs an 8% decline expected.  Ford’s sales were down 7.4% vs an expected 5.5% drop.   Chrysler’s sales dropped 10.5% vs. -6.1% expected.  In aggregate, including foreign-manufactured vehicles, sales were down 7% YoY.

Untitled1.png?resize=604%2C206

http://investmentresearchdynamics.com/crashing-auto-sales-reflects-onset-of-debt-armageddon/

And whilst the effect of auto loan defaults is being dismissed as a mere blip in comparison to the scale of the events in 2007, Americans in most of the country absolutely need their cars given the lack of public transport, so the knock on effect this essential need may have on delaying mortgage repayments musn't be underestimated.

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2 hours ago, Ash4781 said:

I think some of it is trying to keep up with the peers hence it cascades so if an ordinary person feels the need to keep up they can only keep up with the PCP model. I've heard of ridiculous stories of people's desire to raise a deposit to get in. All they see is other people driving Mercs, Audis.

Another factor is possibly diverted spending/lack of saving due to insane house prices. If I'm stuck renting might as well drive a nice car and see the World, what's the point in saving for a deposit when prices go up 10x faster than the amount I can save.

Edited by Barnsey

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6 hours ago, thewig said:

the amount of people buzzing around in those tiny little bmw/audi/mercs is unreal, zipping about the place in a mini metro with a badge on it thinking they are the don. since when did slapping a badge on a wheelbarrow = status? I'm perpetually perplexed out on the roads

Excellent comment! B)

They do tend to be driven by smug gits who think they're **** of the...whatever. :unsure:

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6 hours ago, thewig said:

the amount of people buzzing around in those tiny little bmw/audi/mercs is unreal, zipping about the place in a mini metro with a badge on it thinking they are the don. since when did slapping a badge on a wheelbarrow = status? I'm perpetually perplexed out on the roads

It's all about status, people buy high performance cars that frighten them as they are under the illusion that people are looking at them in admiration. I have 3 cars, the newest is 2003 and the way I am perceived differs with which one I'm driving.

The 1956 car (which keep because my grandad bought it) has me down to these people as as an amiable old duffer.

The 1994 car was unloved when I bought it but now has the stupid "modern classic" status and in that I'm seen as a wise car enthusiast and investor (only ever one of two comments, from petrol heads "nice car", from poseurs "what's it worth?")

The 2003 hack has me perceived as some poor deluded peasant who can't afford a decent car....

Only difference is, I own mine :lol:

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12 minutes ago, MattW said:

^ swear word filter picked up on the word 'c0ck' btw. :blink: A male hen.

'C0ck' isn't a swear word anyway, is it? Is pen1s (apparently, yes)?

Edited by Errol

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1 minute ago, Gigantic Purple Slug said:

I think the biggest issue with this is not financial armageddon, but the fact that it has bought a lot of the demand forwards. They only get to do that once.

Quite.

 

The next question is going to be "Now what?"

 

If no "what" is forthcoming things are going to get interesting.......

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