Saturday, 15 July 2017

Carney. Confused Again.

A couple of things strolled into the orbit of my consciousness over the last few weeks.

First there was this from The Greatest Central Banker in the World.   (I am a fan of Cockney rhyming slang.)  In fact if you search Google you get an excellent list of contradictory stories, but hey?)

Then there was this from Autocar.

And today this from the Telegraph.

Lets look at this whole PCP thing for a bit and take the Telegraph's Merc figures as a basis.

The Merc is £35,205.  That's actually £29,338 for the car and £5,867 VAT.

The net residual value at year 3 of £15,950 (which looks like the dealer trade in value, not the retail price which is about £18,500, although the example in the link is under average miles). So let's assume the residual value is £17,250.  The actual 'depreciation' is £29,338 minus £17,250, that is £12,088, or about £4,000 per annum. The monthly rental of £344.59 is a total of £12,405.24 - which, surprise, surprise, is the same as the after VAT depreciation plus a bit of interest.

By proportion VAT is 50% of the depreciation. If the VAT is financed by the PCP that is off balance sheet borrowing for the government.  Or more accurately government income financed by the car buyer. In the example in The Telegraph the £5,999 deposit is clearly paying the VAT.

It is also important to note that frequently you get three years full serving thrown in, and on some deals that can include tyres.  And even motor insurance.

I also know that the factory gate price of a car is about 50% of the forecourt price.  That 'factory gate' ratio probably includes design and development and other overheads since, I have heard it said, that the actual build cost can be as low as 20% of the forecourt price.

So WTF is Carney on about?  The dealer sells a new car.  The maker gets his money. The buyer gets a maintenance free reliable 'transport solution', and the government gets its tax.  And after three years, by my usual wise buying, I can get a used car in excellent condition at an excellent price that'll probably be good for 250,000 kilometers, and the dealer makes another £1000 from the difference between the PCP residual value and the forecourt retail price.  Even the bank financing all this makes a modest return against a security.

PCP's are the modern way to buy a car.  It's renting one.  As with software. Don't buy MS Office rent it through MS365.

But what this does teach us is that Carney still hasn't got a clue. Seemingly.

10 comments:

Graeme said...

I know that car enthusiasts and dealers never buy new cars because of the first year alleged depreciation. Would you lease a new one under a PCP?

Mark Wadsworth said...

G, this is a traditional pub argument, where everybody has his or her own opinion and sticks to it.

My view is, buy old cars for a couple of grand and hope for the best. With a bit of luck and a few hundred quid for repairs each year, it'll last as long as you need it.

Others say if you shop around and get lucky, you can get a brand new car for a couple of hundred quid a month. In £££ terms they seem to be right. But I don't even like new cars. Bleurgh.

Lola said...

MW. I have 4 daughters. I am an expert at finding used car deals for them and me.

Lola said...

This was really about carney's dire warnings. he's not thought it through. The finance is not a problem for the 'buyer' (really a renter - it's a rent. The finance is really the issue for the car company. But even then it's not a massive problem. The real issue is that the chief outfit being financed is the bloody government through the VAT. This is off balance sheet government borrowing.

Mark Wadsworth said...

L, arguing about second hand Vs new; which car is better: and outright purchase Vs HP or FL or PCP are all enormous fun and utterly pointless.

Everybody knows buying second hand sports cars for cash is best :-)

Mark Wadsworth said...

But getting back to your main point, Carney is an arse hole.

Graeme said...

The staff of the Bank of England seem to be on your side here
https://bankunderground.co.uk/2016/08/05/car-finance-is-the-industry-speeding/#more-1913

And I love the smell of new cars

Graeme said...

Not sure if this posted...

The staff at the Bank of England seem to agree with you about the risks of PCPs
https://bankunderground.co.uk/2016/08/05/car-finance-is-the-industry-speeding/#more-1913

But love the smell of new cars :)

Mark Wadsworth said...

G, I have set it so that comments on posts older than 3 days go to moderation (they are mainly spam).

Good link, it explains that the 'risk' is largely with manufacturers. It is not money printed out of nowhere, they are selling cars but accepting payment in instalments.

I prefer the smell of old cars when the plasticky smell has worn off and just a hint of petrol fumes seeping into the cabin :-)

Lola said...

MW You need to come and sniff our racer then - a cocktail of race fuel, oil (both engine and transmission), fibreglass and latent hot metal...