The Senior Lecturer is just so well informed, isn’t he?

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.

It’s not the banks doing the financing:

So it would take a big drop in used car prices to cause serious problems. If that occurred, it would hit the leasing divisions of carmakers first. The Bank of England reckons they finance 70 per cent of new car leases in the UK, and they are vast businesses. Globally, Volkswagen’s financing arm alone has €157bn of loans to customers on its books. They are also an important source of profit in an industry where manufacturing margins are thin.

52 thoughts on “The Senior Lecturer is just so well informed, isn’t he?”

  1. A friend of mine used to work for one of the big car companies, working out what the expected residual value would be and setting the lease amounts accordingly. He got out a couple of years ago – I can’t imagine that’s a great job to have now

  2. Sounds like it’ll self-balance. Downturn means people can’t afford new, so they have to buy second-hand, thereby pushing up the residual values. In an upturn, the dealers don’t care so much about the residuals, as they can make their money on new-car volume.

    The sums still dwarf mortgage debt. A car market crash won’t make the banks flinch; a housing market crash would be fairly devastating (as we saw a decade ago).

  3. It used to be said that the Ford Motor Company was a very large bank with a medium sized car maker attached.

    Now it seems they all are.

  4. Mark Steyn said something similar about General Motors – that it was a large pension/welfare scheme which also happened to make cars.

  5. Does this dickhead think you go into BMW, see a nice new car you’d like, and call your bank to arrange a loan? Hasn’t he seen the adverts on TV which give sample monthly payments, or the posters that are scattered about?

  6. The beauty of this post is that he and his collaborators are too dim to see that therefore QE has been inflationary but that the inflation is not captured in official statistics, so therefore the Green New Deal and People’s QE are completely inappropriate for the British economy as currently configured. Official Money Supply statistics (M4) ignore these loans completely and they are substantial.

    I can scarcely be surprised by anything the fool writes but seriously, I would expect a lecturer in economics to be able to get to a basic level of understanding about loans and credit. I mean, WTF is he teaching these students?

  7. Borrowing loosely from a judgment about a negligent solicitor:

    Murphy sails confidently into areas in which he has no expertise and proceeds to issue “authoritative” edicts about them at variance with prevailing knowledge, unsupported by facts, and seemingly unburdened and unconcerned by his ignorance of his ignorance about the topic at hand.

  8. Van_P: I mean, WTF is he teaching these students?

    The best one can hope for, surely, is “nothing”!

  9. Secondhand car prices are falling – does this mean that the war on diesel is having an effect, and maybe it’s that? If the demand for used cars is rising, surely their price would? Don’t ask me, I’m not an economist.

    PS. Slagging off Murphy as ‘Senior Lecturer’ doesn’t work for me. In a University, you get there by being a good teacher or administrator – it’s a sop because you aren’t going to be a Reader or Professor, but it is still a mark of distinction. What was wrong with Twat?

  10. Globally, Volkswagen’s financing arm alone has €157bn of loans to customers on its books.

    Ace. All more evidence that Germany will kick the EU’s collective arse into giving the UK a decent Brexit deal.

  11. I’m sure there was a guardian article a few weeks ago peddling the same line that the banks face meltdown if the car leasing market goes tits up. Since mr potatohead does no real research he probably is just plagiarising this article.

  12. When car sales were climbing, Spud was saying this was a sure sign of impending doom because neoliberal.

    Good to see that falling car sales are also a sign of impending doom because neoliberal.

  13. I think this also exposes the basic flaw in the business model of Germany Inc. They make a load of cars (cheaply because of a shared currency), sell them into the EU on finance (mostly), and trash the manufacturing competitiveness of other EU players (most notably Italy). We’re going to have a stock market crash sooner or later and/or a WTO ‘No Deal’ Brexit. It’ll unwind.

  14. Does anyone keep count of all the the impending crashes that Snippa, alone among commontaters, notices? This must be the third this week.

  15. If “the stock market has forecast nine of the last five recessions”, as claimed by Paul Samuelson, Spudda must have predicted about 109 of them.

  16. Fred, and when there is eventually a recession he can smugly and gleefully tell everyone how brilliant a soothsayer he is.

  17. The problem is that the rules around VED/Car Tax changed in March this year, meaning most buyers shifted their purchases to the start of the year. I assume this has been factored in?

  18. It was reminding Ritchie that he’d predicted a recession every year that did for Dr. Keith.

    Anyway, Ritchie doesn’t know why anyone would want to buy any car that’s more than a Citroen Berlingo.

  19. “Does this dickhead think you … see a nice new car you’d like, and call your bank to arrange a loan?” That’s what I did though I actually visited the bank.

    Mind you that was decades ago.

  20. I saw a 2nd hand car and called the bank to arrange a loan. Multiple times.
    Have purchased a new car several times, only once using credit facility at the garage.

  21. I think that somewhat like the proverbial stopped clock, Ritchie may actually almost be onto something here.
    I’d not read much into this year’s sales figures, given the VED changes, but the resales value issue has all the makings of a fairly serious problem.

    Over the last 3-4 years or so, certainly within my circle of acquaintances, buying brand new cars on the never-never has gone from being almost unheard-of to pretty much normal. The working class council built estate I live on has streets lined with new cars (when I moved there 5 years ago, the average age of a car there was probably 8-12 years old).
    The interesting question has certainly been forming in my mind for some time “if everyone is going drive a car less than 3 years old, what are we going to do with all the 4 year old+ cars?”

    And lo, it would seem to be coming to pass that the results of flooding the place with brand new cars is that the values of second hand cars are dropping through the floor. This is of course good news for everyone except the motor company’s and their finance houses (who entirely deserve to go to the wall for their own stupidity, but who will doubtless be bailed out by taxpayers “because reasons”), and anyone wanting to buy a new car on the tick (as this is probably about to get a lot dearer).

    As AndrewM says ^^^ longterm this will all balance out, the issue is that short-term it may be rather a rough ride.

    Of course, it remains the case that buying a new car almost always means you’re a mug – by far the best VFM is running round in fairly old cars which have pretty much hit the bottom of their depreciation curve, but still usually have 1/3 to 1/2 of their lifetime mileage left to run… (I paid ~20% of the new cost of my car when I bought it last year, and it was at a mileage that suggests it had 70% of its life left).

  22. It’s not the banks doing the financing…

    True, but in all fairness, when you’re still driving a 1977 Morris Marina, you wouldn’t really have much of an opportunity to run across that fact.

  23. I see that Robert Ley is suggesting final solutions and the end of appeasement once again. The Dicktator seems to believe that Robert’s views are worthy of a wider audience.

  24. @theProle

    I also prefer second-hand cars, old enough that the depreciation has slowed down to an acceptable rate, though not quite as old as you (perhaps irrationally, but I’m pretty paranoid re reliability and unlike your good self I have a skills gap re car maintenance).

    However, for people who live in the South East and occasionally drive in to London, and soon people around the country who drive into major towns, may face an additional hurdle that devalues older second-hand vehicles further:

    The T-Charge is the first of a series of new rates being introduced in London. It is due to be replaced by a stricter Ultra-Low Emission Zone in 2020, although Mr Khan is consulting on bringing this forward to 2019.

    This will mean diesel cars registered before September 2015 and petrol cars registered before 2006 will face a £12.50 charge in addition to the £11.50 congestion charge.

    The mayor hopes to expand the area covered for cars and vans up to the North and South Circular roads in 2021.
    City authorities in Birmingham, Leeds, Southampton, Derby and Nottingham have also been advised to impose charges for some polluting diesel vehicles by 2020, the Department for Environment, Food and Rural Affairs (Defra)

    Obviously not very many people would want to drive into Central London without very good reason, but the North and South Circular enclose a pretty substantial chunk of Greater London, including plenty of places that are poorly connected by public transport (and particularly, badly connected to people getting into them from outside London – you often need to go in to a central rail station, and then out again by tube). If this starts to roll out to provincial towns too, and there is the threat of the charge going up in value and moving forward to capture cars from the next generation of emissions regulations, then this is going to alter a lot of people’s attitudes towards second-hand cars. It’s already playing on mine when considering my next vehicle.

  25. theProle;

    And lo, it would seem to be coming to pass that the results of flooding the place with brand new cars is that the values of second hand cars are dropping through the floor. This is of course good news for everyone except the motor company’s and their finance houses…

    Not necessarily. It does depend on what they’re actually doing, but it is possible that with a falling pound, the car companies are exporting the vehicles they acquire to other markets, booking a profit, or selling recovered parts into others – some countries might have particularly bonkers tariff rates for assembled vehicles, even if used.

  26. If new car sales are down and used car prices are low, either too many cars were being made before or driving behavior is changing. Neither of these options are overly concerning. Either the car and finance companies survive the downturn or they can go out of business so someone else can take a crack at planning for proper production level. If people’s behavior is changing, deal with it.

    The time to care is when new car sales are down and used car prices are increasing. In most cases we don’t need to do anything in this situation. Eventually automakers will ramp up production to meet demand as long as the state allows it. We do need to pay attention to the transportation costs of low income people. The easy solution is to increase welfare wealth limits but we can’t have poor people with the ability to save up enough for a used car. Section 8 landlords will be harmed if they have to pay more than $2500 for a section 8 house and we can’t let any harm come to section 8 landlords. How would we every find section 8 housing if the people living in section 8 housing buy up all the houses for less than 4 months of section 8 rent vouchers?

    Long story short, Richtie is clueless once again.

  27. This will mean diesel cars registered before September 2015 and petrol cars registered before 2006 will face a £12.50 charge in addition to the £11.50 congestion charge

    Knocked off black market number plates just went up 12%.

  28. Coming from the land of the free how on earth would you know about Marinas?

    My father once owned an MG, so I was well aware at a relatively young age that the British couldn’t build cars for shit. The Marina itself came to my attention via Top Gear.

  29. I see that Robert Ley is suggesting final solutions and the end of appeasement once again. The Dicktator seems to believe that Robert’s views are worthy of a wider audience.

    Ley’s comment had me laughing out loud. That nobody – including Murphy – has caught on is priceless.

  30. @MyBurningEars

    I’ve moved to slightly new cars at the moment – I’m currently on a 58 reg Toyota that I acquired a little over a year ago with 31,000 on the clock, and which now has 61,000 racked up. Total “repairs” has been four front tyres, two rear tyres, two lots of oil and filers, and disks and pads for the front brakes. I’d regard that as an acceptable tally for 30k miles in anything (I do still do all my own repairs and servicing other than the tyre changes – rather to my surprise, Toyota have gone out of their way to make it easy to service – I was going to pay a garage to service it till I looked underneath and realized how easy it was to fix).
    I don’t intend to keep it once it starts going wrong regularly – I reckon Toyota have probably aimed at a design life of a little over 100k miles, so my intention is to flog it at 100k as a going concern and buy another slightly newer specimen, preferably one that hasn’t been very far.

    I think all the current LEZ charge rumblings are almost certainly primarily a government effort to prop up the value of 4-6 year old cars by effectively banning people from running old bangers unless they live in the middle of nowhere, in order to keep the car companies and their loanshark mates in the black. It’s hard to express how angry this makes me – effectively it’s a stealth tax mainly on the poor in order to properly up idiot bankers, with a massive side order of destroying value for no good reason (scrapping cars which are not worn out is both economically and environmentally bonkers – depending on who you ask, building a new car produces between a third and a half of it’s lifetime tailpipe emissions).

  31. Re: Prole

    The good thing about collapsing used car prices in the UK is that this may filter down to cheaper car prices here in New Zealand. We have an enormous market for 2nd hand used car imports, mostly from Japan, indeed most people that I know are driving around in a car that spent the first three years of its life in Japan.

    British cars are starting to come in more now that speedos and mileometers can be easily changed from imperial to metric. We won’t be able to suck up all of your used car inventory; but there will be other RHD countries that will take them (Ireland, much of Southern Africa).

  32. DtP: My father once owned an MG, so I was well aware at a relatively young age that the British couldn’t build cars for shit.

    I have an MG, bought second hand in 1974 and still going strong. Americans -to borrow your expression- can’t drive for shit and build cars to match.

  33. @theProle

    Cheers for the reply. Almost identical mileage and age preferences to me, actually! I’m also looking to get shot of my current motor by the 100k mark, perhaps with a bit of room to spare, so in my case I’m already half-looking at what’s out there with an eye to buy in two years or so.

    Don’t do my own servicing because I’m not a very practical person and the couple of hundred pounds I might save by doing so doesn’t seem likely to repay the hours it would take me to acquire the skills nor the fear of having cocked up something potentially safety-critical. But I admire the self-reliance of those who can.

    If there’s any sign these LEZs are going to spread, I’ll likely aim for a second-hand car that’s just a couple of years old – only try to avoid the really steep bit of the depreciation curve, rather than to dodge most of it. Bearing in mind the time I expect to replace my current one, that probably means buying something that’s out now.

  34. I’d probably reserve judgment about where the debt has ended up. VW may have retained a decent chunk, but worth considering (I) how much they originated and didn’t keep and (II) how much other finance arms have originated and flipped on.

    These days I bet you could get a car lease securisation deal away in next to no time if you wanted to.

  35. I’m not sure what the problem is here.

    Should things get sticky, car companies can just buy a bank and create whatever money they need. Or just become a bank.

  36. I think it’s unduly cautious to get rid of a modern car after ‘only’ 100k miles. My last but one was a Honda Civic 1.8 VTi bought new in 1997, which I ran for 12 years and 140k miles without missing a beat (I only got rid of it to take advantage of the Mandelson scrappage scheme).

    I suggest talking to a local one-man private hire operator. The one I use buys Skoda Octavia diesels with 50-60k on the clock and runs them for a further 300k miles. He claims that as long as they’re serviced correctly (with his mileage, that means an ‘annual’ 12k service every few months) he has no problems with them.

  37. I recall that the sales of new cars used to have a similar trend to overall economic performance, but that was when I did economics in the early 80’s and even then it was commented that it was becoming a less reliable indicator, maybe it’s something spud recalled from his studies years ago and didn’t bother checking on It

  38. Some of the leasing companies try selling off their returned cars to their customers.
    Every month I get a list of cars and basic details along with suggested price. As a long standing business customer I can take advantage of their offer and they save on transport & cost of auction / flogging in bulk to a large dealer.
    May be able to get cheaper at auction but small dealers will also bid on those so maybe not.

    Mostly for my purposes overpowered and abused vehicles (sales reps never change) but sometimes a nice little gem or two, smaller cars or vans that would suit me.
    If I could afford them.

    £4k for a car is nice when you see similar ones at the local garages at £5k+.
    So far the company concerned do not seem to have an issue with low 2nd hand values, talking to my rep he says there have been good and bad times before. The company offsets issues in one part against price in other parts – and there are a lot of ways to earn money for a company besides simply buying and selling of vehicles.

  39. Spud is also assuming that the residual value stated in the lease contract is the same value the car company has it valued at or expects to receive for it, just because they charge you based on an assumed value doesn’t mean they haven’t built in any profit or uplift value or risk element into that figure already

  40. Gunker said:
    “all those 2nd hands diesels from the UK are flooding into Ireland”

    A dealer bought my wife’s old diesel Merc; said he was dismantling it and shipping the parts off to Africa.

  41. @Chris Miller

    It all depends on the car. VW Passat/Audi A4 with the old 1.9tdi engine and I’d be wanting my 1/4 million miles.

    Tinny little Toyota with a 1.3 petrol engine that’s doing 4k revs at 80mph in top gear, and which has probably been calculated on average to have rotted it’s way to an MOT fail at 15 years old before hitting the 100k mark, and I’m not minded to find out just how far past said 100k mark it’s designed to go.
    Apart from anything else, it doesn’t make economic sense – I gave £2k for the car with 31,000 on the clock, and would expect to still get £1000 for it at three years older, and at the 100k mark, if it’s got a fairly new MOT and no obvious faults. That’s 1.4p/mile depreciation since I bought it. Say I scrap it for £100 when the engine blows up at 150k miles (I don’t see it lasting much beyond that), and the last 50k miles will have cost me 1.8p/mile, plus the inconvenience of the day it finally pops its clogs (and having to buy another car pretty much on the spot will probably result in a less good deal than a planned change).

    Out of interest, having been moderately impressed by how well it’s put together, and how little trouble it gives (work’s fleet includes newer and lower mileage Renault and Ford vehicles which have been quite keen on trips back to the dealership), I’m considering it’s eventual replacement being a diesel Avensis estate (I really could do with a bigger car), probably around the 2010 model. From the collective wisdom round here, are they any good?

  42. VW were incandescent with rage at Skoda for one of their engines. The 1.9 I think. Built for mean time to failure of 300k. VW thought that was much, much, too long. I’ve done a little work for Skoda and a mate does a lot. The engineers still seethe at being told to tone down the reliability.

  43. Dennis,

    There were a lot of MGs that worked. Problem was they worked pretty well at running into things (nice cars when running, or so I am informed (I had to sit in the back seat, such as it was in a BGT…), but the drivers tended to have accidents in them…), so the ones that didn’t work survived longer. My family on its own can account for three totaled MGs in the late 70s and early 80s (clearly had decent safety, as no broken bones were involved…).

  44. @ Tim
    Skoda built good cars even under Soviet hegemony. I asked a guy in Bratislava in the early ’90s why there there were so many inferior Ladas around and the answer was that you have to put your name down for a Skoda and wait three years but you can buy a Lada in a minute.
    VW got a steal because when Czechoslovakia liberalised prices for anything worth buying went up 50% but most Skoda buyers then needed another 18 months saving to pay for their new car and sales briefly slumped.
    Czech enginering is good.

  45. ‘The UK’s largest car dealer had a bad day yesterday. It issued a profit warning and its shares fell by 17% in value.’

    One has to not understand stock to call it a bad day.

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