Would YOU Buy A Car, Mr. Brown?

As Superman Brown urges banks to lend and us to spend and contemplates saving the car industry, I guess the acid test is whether HE would buy a car or not in these current times.

Monday’s Telegraph reported that thousands of motorists are suffering from the concept of ‘negative equity’ much like home buyers. This phenomenon comes about when someone buys a car on lease with a deposit and monthly payments, with the idea of having the option to buy the car at the end of the lease with a single ‘balloon’ payment based on the estimated secondhand value of the car at the time when the lease was taken out. Such leases are known as Personal Contract Purchase which handily spread the cost of a car purchase over a couple of years.

In the old days, such schemes were reasonable value, and those on company car leases if offered a chance to buy their car at the end of the lease, often would be incentivised to look after their car. The reason was that the lease company estimates on the secondhand value of a company car at the end of a lease would be significantly lower than the average care car of the same age as the stigma of company reps driving cars into the ground usually made them only good for auction.

But, now that the bottom has literally fallen out of the secondhand car market after the failure of the new car sales market, cars coming to the end of their leases are actually worth a great deal less than the original estimates when the lease contract was taken out – leaving a considerable negative equity. The Finance and Leasing Association has confirmed that many people who took out such contracts are now handing their vehicles back. Both the person with the lease contract faces excessive balloon payments and the lease company also lose out as the cars are auctioned at considerably lower than the prices originally estimated

Bigger Wasn’t Better

Those who used such contracts to afford more expensive cars (perhaps this is why we have seen the glut of swanky high-end motors and 4x4’s on British roads in the last 5 or 6 years?) will suffer most as more expensive cars have been hit the most.

So, when Mr Brown dwells upon saving the car industry, there is an infinitely more complex situation at work. Car sales in the UK dropped 21% last quarter which is a far cry from the massive declines seen in the US, but there is always next quarter and a registration change to think about. Further, any bail out to the car industry will not be to help stimulate sales but to mothball production lines and prevent mass unemployment as there are an estimated 800,000 jobs associated with the UK car industry. This report shows that there is little point in people going out and buying cars if the lease contracts mean they will pay way over the odds or indeed to buy a fast-depreciating asset.

Utopian Britain

Once again, in the dreamworld that is Government these days there seems to be a vain hope that by borrowing more they can rekindle the excesses of the last decade. The nightmare that is reality in the country says no one has the appetite and confidence, let alone the money to make that dream a reality. Then again, I don’t suppose Brown, Mandelson and Darling have had to worry about paying for their own vehicle or transport since becoming Ministers which shows just how out of touch with reality they can be.

Old Habits Die Hard

As a footnote and on a different subject, I was little shocked to read in Private Eye that Goldman Sachs made a loss of $2.1bn last quarter and still paid out $2.6bn worth of bonuses (even though they said they would not). Good to see all that bail out money being put to good use then. Happy days for all the old gang too as the FSA has lifted its ban on shorting, which did not stop several culprits losing $30bn in a single day’s trading on a single share (VW) after the ban was imposed. It’s nice and official now and shows the system is getting back to its normal, shady self.

Roll on 2009 bonuses now the banks have been saved.