Tuesday 17 September 2019

Used cars sales accelerate on the back of slide in sterling

Second-hand imports will almost match sales of new cars in 2018 and have cut trade-in values by 20pc

Sales of diesel cars are predicted to slump, given their depreciation in value at trade-in time
Sales of diesel cars are predicted to slump, given their depreciation in value at trade-in time

Dan White

The number of imported used cars registered for the first time in January surged by a further 18pc on January 2017 to 6,800. Used car imports in January 2018 were up 76pc on the January 2016 figure. Meanwhile sales of new cars, which fell by 10.5pc to 127,000 in 2017, were down by a further 3.2pc to just over 25,800 last month.

Blame Brexit. The collapse in the value of sterling that followed the UK's June 2016 vote to leave the EU has opened the floodgates to a tidal wave of used car imports from the UK. Second-hand imports have risen from just 47,200 in 2015 to 70,100 in 2016 to 92,500 last year.

Used imports made up 42pc of all cars registered for the first time in 2017, up from 33pc in 2016 and just 28pc in 2015.

The number of used imports will rise even further this year. Alan Nolan, director general of the Society of the Irish Motor Industry, predicts that up to 110,000 could be registered for the first time this year as against 120,000 new cars.

If Nolan's prediction is borne out then used imports will represent 48pc - almost half - of all cars registered in Ireland for the first time in 2018.

The knock-on effect of this huge increase in used imports has been a sharp fall in Irish second-car values, bad news for anyone thinking of trading in their existing car for a new one.

A mid-2017 survey of its members by SIMI reported an average 15pc fall in second-hand values since the UK voted for Brexit. Most motor trade sources reckon that second-hand values have continued to fall since then and could now be down by anything up to 20pc.

Not alone is the fall in second-hand car values bad news for motorists hoping to trade in their existing model, it is also potentially bad news for the financial institutions that have lent motorists money to purchase cars.

Almost half of all new cars sales to private buyers are financed by what are known as Personal Contract Plans, basically a shiny new name for what was once known as hire-purchase.

With a PCP, which typically lasts for 36 months, the motorists pays a deposit of between 10pc and 30pc of the purchase price of the car up front while the lender guarantees the future value of the car at the end of the contract period, usually about 38pc. This guaranteed minimum only becomes repayable at the end of the PCP.

After 36 months the buyer has three choices. She can hand the keys back and walk away - hardly likely when she has already paid a deposit and 36 monthly repayments; pay off the guaranteed minimum value in a final balloon payment; or - as most people do - use the difference between the guaranteed minimum value and the car's actual trade-in value as the deposit for a PCP on a new car.

PCPs can make it very affordable for motorists to change their car for a new one every three years. But there's a catch. And that is where falling second-hand values come in.

What happens if the actual trade-in value falls and the gap between it and the minimum value guaranteed by the lender is insufficient to meet the deposit requirements for a new PCP? At the very least many motorists could face a nasty surprise as they are forced dig into their pockets to top up the deposit.

The Irish car finance sector is dominated by Bank of Ireland, which provides finance to Hyundai, Ford, Opel and Kia buyers and motor manufacturers' own in-house banks with Volkswagen (which also owns the Audi, Skoda and Seat brands), Renault and BMW all having their own finance arms.

Last week Toyota, which had previously used Bank of Ireland, launched its own in-house bank, Toyota Financial Services Ireland (TFSI), a joint venture between the manufacturer's financing arm, Toyota Financial Services, and its Irish-owned distributor, Toyota Ireland.

The two shareholders are investing a total of €20m in the new venture, which hopes to lend €70m to Toyota and Lexus buyers in its first year of operation and to build up to €350m of assets within five years.

Given the impact used imports are having on second-hand values, is now the right time for Toyota to be launching its own in-house bank?

"Some 45pc of people use some sort of finance to buy a new car. It is a very competitive environment. Finance is very important", says Michael Gaynor, Toyota Ireland marketing director.

He notes that, while all second-hand values have been hit by the post-referendum influx of used imports, diesel has been particularly badly affected.

This is reflected in the guaranteed minimum values being offered by TFSI on its PCP contracts.

While buyers of hybrids are guaranteed a minimum value of 43pc of the original purchase period after three years, buyers of petrol-engined cars are being guaranteed 39pc and diesels just 37pc.

As one of the pioneers of petrol/electric hybrid, 48pc of Toyota and Lexus sales since the start of the year have been hybrids.

Toyota obviously has a vested interest in pushing its technology, but a six-point PCP gap is bad news for the tens of thousands of car buyers who responded to lower road tax to buy diesel.

Gaynor expects the proportion of new car sales being diesels to drop from 65pc in 2017 to just 25pc-30pc within three years. This process is already well under way with diesels accounting for 56pc of the new cars registered for the first time in January.

SIMI's Nolan estimates that, with a national car pool of 2.2 million, the "natural" rate of new car sales should be about 7pc-8pc of this figure, about 140,000-160,000.

He points out that many used imports are very long in the tooth with 7.3pc of last year's used imports being more than ten years old while a further 29.7pc were between six and nine years old.

In other words, almost two-fifths of last year's used imports were at least six years old. This would seem to at least partially support SIMI's concerns about the quality and safety of some used imports.

However, despite the problems resulting from the Brexit vote and used imports, Nolan remains optimistic.

"This is a short-term problem. There are two possible solutions. The first is that the UK ends up outside the customs union which will result in customs, tariff and VAT issues for used imports. The second is that it remains inside the customs union in which case sterling will strengthen again".

"In the meantime we will have to live with the consequences of the free market that we support."

Sunday Indo Business

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