What Will Happen To Car Leasing Following Brexit
Tuesday, 22. November 2016
On the face of it nothing much has happened. There has been a bit of a drop off of cheap lease deals but that is pretty much down to the fact that most manufacturers will hit their new car sales targets this year with a total number of new cars sold, close to or hitting 3 million. And if you are hitting your targets why give away more discount than you need to?
You’d have to be nuts. This also means that in 2 or 3 years time when the lease deals end there will be a surge of used cars in the market just as we fully exit the EU. Good news for used car buyers but bad news for the leasing companies who have to try and predict future values.
With this in mind we have already seen an upward adjustment of rates due to two things. A price increase imposed by most manufacturers following the weakening of the pound and a re-alignment of resale values for the reason stated above. Now having said that leasing companies are very poor at predicting future values. They said that 2016 would see a slump but it didn’t, in fact used car performance this year has been particularly strong.
The problem is that leasing companies take a simplistic approach. They use a very simple supply and demand model, which for many seems to be the only way to predict the future. For example if we have sold a lot of cars this year on 3 year leases it makes sense to assume that there will be a glut of 3 year old cars in three years time, thereby driving down the price of these cars in auction and through the trade.
But my theory, and it is only my theory, is that the used car market isn’t linear. Let me explain, each year somewhere between 8 and 9 million used cars change hands. A linear approach would suggest that demand remains constant, so there will be roughly the same number of 1 year old car buyers (that’s the car not the buyer – good grief), the same number of 2 year old car buyers etc.
If we have roughly the same number of buyers of 3 year old cars in 3 years I agree that the average car price would drop. But this ignores desire. Experience has shown that as manufacturers change models more frequently there is a greater desire to have a much newer car with more gizmos fitted. So many 4 and 5 year old car buyers force themselves into the 3 year old sector increasing demand and forcing up prices.
So will we see any major changes as we exit Europe? Much depends on the trade arrangement that we negotiate. If we negotiate a strong tariff free deal it will not only ensure that we don’t have to factor in duties but that should also strengthen sterling. And with consumers mainly funding new cars on the more expensive PCP with only 5% using the cheaper Personal Contract Hire (PCH) I believe that the industry will remain generally buoyant with a few glitches along the way! You’re right I haven’t got a Scooby! By Graham Hill
