Here’s a strange one for you. Bloomberg is reporting today that European new car sales have crashed hard in the last year – overall, sales are down around 10%.
But amazingly, UK punters are clamouring for new motors, with new car registrations up over 11.5% on last year! What gives?
Well, it’s often the case that Brits tend to be a little bit different than their continental counterparts – and long may that be the case. But believe me, new car sales should not be taken as an indication that the UK economy is in some way more resilient, or indeed in better shape than mainland Europe.
In fact, the way I see it, it’s quite the opposite.
The UK car market reminds me an awful lot of sub-prime in the US. I think the US obsession with new homes, financed on the never-never has more than a passing similarity with our own obsession with buying new cars.
Indeed, I think this is a symptom of a much bigger story.
I believe punters are being duped into bad investment decisions to satisfy short-term pleasure urges, just to keep the finance industry in clover. And we are allowing this to happen because of a dangerous obsession at the heart of British society. This obsession has been festering for a few decades now. And somehow we have allowed it to take complete control of our society.
To be blunt, there are very disturbing implications for you and for me. And I’m not just talking about our investments. It’s bigger than that...
We are a nation of car renters
Just to put the UK’s 11.5% growth in new cars sales into context, consider this: Dutch sales were down 30%; and in France, Italy and Spain, sales were off about 20%. Perhaps less surprisingly Greek sales crashed by 47%. Clearly the Europeans are reacting to a harsh economic environment.
But it’s kind of shocking that the UK seems totally immune to the economic malaise engulfing the whole of the Western globe. How is it that the UK can march in such a different direction? As I’ve already suggested, it all comes down to debt.
In this country, 68% of new car sales are financed by the dealerships. On top of that, many more will have been financed by personal loans or online car loans. Car Loan 4U, the UK’s largest online car finance website reports loan completions up 76% over the last year.
It’s exactly the same situation in the second-hand forecourt arena.
The Finance and Leasing Association (FLA), the trade body for the motor finance industry, says that between April and June 2012, the value of new car finance increased by 38% compared to the same three-month period last year.
That’s up 38% in just a year!
An exclusive report from The Right Side
Don’t look under the bonnet
To all intents and purposes, we’re becoming a nation of car renters. The way it tends to work is like this: punters put down a small deposit and pay a set monthly sum to the finance firm over three years.
At that point, the punter can choose to buy the car from the finance company – which is unlikely as they don’t have the money - or they use the negligible equity they’ve built up in the car as a deposit for a new one.
In this way, the punter never really owns the car and he’s sucked into a never-ending merry-go-round of paying interest to the finance companies. Sure, the motorist gets some relatively hassle-free motoring – but at what cost?
I don’t trust all those 0% finance deals. Consider the fact that the car will be worth 20% less the moment it drives off the forecourt, and often 40% less a year after that. Start to do the sums and you see that the real cost is nothing like 0%!
The whole situation says an awful lot about British society. What we have here is an urge to spend, an inability to save and ultimately a remarkable indifference to building up debt and propping up the financiers.
I spend a fair bit of time on the continent, and it’s quite a contrast to the UK. When I was first buying properties abroad, it was quite a shock to see the hoops you had to jump through to raise a mortgage. Having come from the UK, where the banking industry was desperate to hand out cheap and plentiful loans, it all seemed a bit backward.
And when it came to cars, second-hand prices could easily be double the UK equivalent. If only we didn’t have the steering wheel on the wrong side, it would be a fantastic business, shipping UK motors to the continent!
You see, on the continent, a second-hand car is a prized asset – and they squeeze an awful lot more miles out of the average motor. There isn’t such a fondness to take on debt and buy new.
In the UK, the fashion for new leads to a glut of three-year-old cars coming off of lease arrangements. And more often than not, those cars are sold to other punters on new finance deals – all the time enriching the dealers and finance companies.
Poor old Mr Average Brit has very little cash. He rents a new (or nearly new) car because he can’t afford to buy one outright. Rising new car sales is not a good sign. It’s a barometer on a society increasingly hooked on debt.
In fact, I’ve been thinking about this obsession ever since I watched a screening of a new MoneyWeek documentary last week. This is the first time MoneyWeek has gone to such lengths to deliver a big message to their readers. And it made a big impression on me. I can’t help feeling that we have become dangerously complacent about the build-up of debt. And it was stunning to see the naked truth of the matter laid out for all to see in this film.
A really frightening chart
I mean just take a look at the chart below. It shows how much debt we have taken on over the last couple of decades. And the story here is of a country that has simply gone bananas. Total indebtedness has risen from just over twice the size of our economy in the '90s to over five times the size of our economy today.
Total debt as a % of GDP
Source: Haver Analytics National Central banks & McKinsey Global Institute
Okay, so we’re not totally alone there. As you can see, Japan is up to its eyeballs in debt too. But if you look at the trajectory of our debt build-up, I think you’ll agree, it’s rather shocking.
According to the Monetary Policy Committee's Ben Broadbent, the UK private sector is the most indebted in the world. In the world!
This is a serious problem. I think you should watch the MoneyWeek documentary when it’s released. But I’ll definitely be returning to this story in the Right Side in the coming months.
I’d like to show you how explosive I think this problem could be for Britain. And I want to show you what you could do to help protect your wealth. Because I’m certainly taking measures myself.
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