Toxic danger of car loans CITY EDITOR
ANYONE driving around Britain will see the telltale signs. Citizens used to take pride in front gardens, now it is the gleaming SUV parked in the driveway.
Personal contract purchase (PCP) deals have been racing away, with some £5.6bn run-up in 2016 making it a record-breaking year for car makers.
In the early noughties, mortgages were parcelled up as securities and sold to investors with catastrophic results. Now the same danger looms with car loans.
When the mortgages that were sold to people who couldn’t afford to keep up payments went wrong, the world was plunged into crisis. So far PCPs have held up well because the second-hand market, or residual values, have been firm.
But credit ratings agency Moody’s is raising alarms. It notes that customers may underestimate the scale of their final payments and there is a risk that the proceeds from the sale of a vehicle will fall below the contractual amount. Moody’s calls this residual value risk.
The scale of this risk may not compare with sub-prime mortgages but the principle is just the same. If rotten PCPs, with serious default risk, are wrapped up with better loans in securitised packages, then the value of the asset-backed securities (ABS) could be questioned and the bottom falls out of the market. The damage would cascade through the financial system.
The residual value of many PCPs has been rendered even more toxic by the popularity of diesel cars in recent times – before realisation dawned that they are poisoning us. Another good reason why originators of these loans and people holding the ABS should be cautious.
Buying a car these days is the Wild West. Dealers and distributors frequently offer customers a share of the finance company’s commissions – ‘backhanders’, if you like – to incentivise sales. The credit rating agencies looked to have learned lessons from subprime. Car finance firms and banks must see beyond the next distorted quarterly results to the long-term dangers.
Orange light
A DOWNWARD revision in the nation’s output from 0.3pc to 0.2pc for the first three months of 2017 is disappointing.
Horror of horror, it is a quarter when Britain was outperformed by the laggards of the eurozone. The decreasing band of experts who voted Remain and now talk about falling off a cliff edge may feel they have something to crow about.
Maybe they will be proved right, because we know the economic cycle of boom and bust has not been written off.
What we should note about the 0.2pc in the first quarter is that it is not wildly out of line with growth in previous years and there is a pattern of momentum building as the year progresses.
The easily adopted explanation is that household incomes are being squeezed by rising inflation and slow wage growth.
The gap between inflation and wage increases has not been that great so far. Grocery prices have remained suppressed and the biggest cost for many families, the monthly mortgage repayment, remains steady thanks to efforts of yogurt enthusiast Mark Carney. In other words, the squeeze on household incomes is far less than might be imagined and, in any case, history suggests it does not stop people spending. But the gross domestic product numbers are not entirely negative. Business investment is up and, in much the same way as a cheaper pound pushes up import prices, it also assists exporters and firms with interests overseas who repatriate income.
Finally, almost every consumer company has noted that Easter – a big shopping period for goods and summer hols – came late, so missed the first quarter. Surveys for construction, manufacturing and services all have pointed sharply upwards in April.
Too early to be issuing recession warnings just yet.
Bargain hunting
ABERDEEN boss Martin Gilbert is vexed over the scale of £97m of fees which advisers are stripping out of the marriage of convenience between his firm and Standard Life.
If he was really so troubled he could have held an open tender among investment bankers and given the opportunity to the lowest bidder. One of the second-tier houses surely would have been willing to do the work for half price or even less, and might have done a better job in putting together the management structure rather than allowing roles to be doubled up.
Not a chance.