Is the car market about to crash?
Having spent a few decades working in the industry, my eye is naturally drawn to media stories about the automotive business.
However, alongside the headline news that General Motors is considering selling off its Vauxhall brand to France’s PSA Group was another item that caught my attention.
In essence, it appears that a growing number of market analysts are pondering whether cheap car loans could be the driver behind the next financial crash.
I’d normally put the prediction down to scaremongering were it not for the fact that a few reputable outfits are drawing parallels with events that preceded the 2008 meltdown.
British households borrowed a record amounts for car purchases, according to the Finance and Leasing Association.
That’s because nine out of 10 private car buyers are now using Personal Contract Plans (known as PCPs), which have mushroomed due to current low interest rates.
Under these leasing deals, buyers pay a small deposit and then make monthly payments for the next three years. The options then are to buy the car - or hand it back and start a new PCP.
2016 was the fifth consecutive record-breaking year for new car sales. Some 2.7m new motors rolled off the forecourt resulting in £31.6bn borrowing.
This figure is of course dwarfed by the US market where binge-buying has stoked the latest total to $1.1tn (£880bn) in outstanding car loans. It’s this trend that has sounded a few warning bells.
Finance packages are readily available to households with flat or falling incomes; which represents some worrying similarities with the infamous sub-prime mortgage phenomenon, say the monitoring agencies.
Last month, the Bank of England announced that consumer credit, including car loans, was close to levels not seen since the 2008 financial crash. No official concern was expressed but the background noise is that there are jitters over how car-leasing loans have been packaged into ‘asset-backed securities’ and sold on to investors, including pension funds.
It’s the same kind of asset package that played a major role in the credit crunch - although the shaky collateral this time around is cars, not houses.
When market confidence in residential mortgage-backed securities collapsed in 2007-08, the effect was felt across the world. No-one can say that the same won’t happen in the automotive sector, or so it seems.
A factor that could well kick things off would be a sharp rise in either interest rates, unemployment or inflation. An inability by millions of punters to keep up the payments on their cars would see an industry-wide implosion. The global implications are obvious.
It’s a scenario that few want to think about let alone admit to the possibility.
Returning to the headline story, it looks like the Vauxhall deal could be scuppered by an estimated £1bn deficit in GM's UK pension scheme. Pensions experts say the prospective French buyer would not want to touch it "with a barge pole".
Let’s hope a similar assessment is never voiced about the leasing business.
Seeking relief over rates
Having loudly demanded a revaluation of business rates over the last few years, I imagine there must be quite a few firms out there right now wishing they’d kept quiet.
Business rates are basically the commercial version of council tax. They relate to the rental value of the business space. The amount depends of the size of the property and its designated use.
There’s been a mismatch between rental and rateable values since they were set seven years ago. Rents have come down but rates have gone the other way.
This has prompted a revaluation which takes effect in April. While it’s good news for many, there are retailers in some areas who face up to a 400% increase.
Ministers insist no more than one in four businesses will have their rates increased. Others will see a fall or no change.
This hasn’t stopped thirteen business groups, including the British Retail Consortium and CBI and the Federation of Small Businesses from signing an open letter to protest at the "outrageous" changes to business rates in England.
Their biggest beef is over measures intended to stifle any appeal. Among these is a rumoured fifteen percent margin of error allowable on valuations. No wonder there’s already talk of a legal challenge.
Expect the loudest appeals however to come from supermarket chains who feel aggrieved that online retail giants such as Amazon are set to have rates go down. Ironic, ain’t it?
Here in Wales, a £10m rate relief scheme will benefit some 15,000 shops, restaurants and pubs facing higher bills.
Commendable stuff and I’m impressed that the Welsh Government also intends maintaining relief support for all previously eligible businesses even if their rates are set to fall.
One example where devolution makes a difference after all.