From the TUC

Car trouble? Sub-prime auto lending hits the real world

23 Aug 2017, by in Economics

Have you ever had a ride in a light blue car? Have you ever stopped to think who’s the slave and who’s the master? Have you ever had trouble with your automobile? Have you ever had to push push push push? Car trouble oh yeah.

– Adam Ant

For those of a certain age, it turns out that in 1980 Adam Ant was asking the right questions. There’s a growing sense of unease around the financial arrangements in the car market. In America talk of sub-prime auto loans echoes the not-so-distant past of the housing market. The Bank of England has also started to warn about the effects on UK financial stability.

But it’s not just financial stability we should be worried about. In the real world, the car industry looks like it’s struggling:

  • Car registrations have fallen by 10% over the year to 2017 Q2 and Q3
  • 2017Q2 has seen the steepest decline in motor vehicle production since the global recession
  • Car retail and wholesale grinding to near zero growth in 2017Q2
  • A fall of 19% in capital investment in motor vehicle (and engineering) industries, steeper than in the global recession
  • Exports decline 5% in 2017Q2
  • At 3.5%, the highest new car price inflation since 2011

Before turning to these figures, a review of the financial processes. Adam Ant may have feared becoming slave to his automobile. But today the worry once more is that the real economy is slave to the speculative excesses of the financial sector.

What’s going on with car financing?

‘Personal contract purchases’ now account for around four in five car purchases, compared to one in five in 2006. These permit consumers more favorable interest rates than on other forms of credit (e.g. a bank loan), as well as greatly extending the amount of finance available for car purchase.

The norm is that buyers (renters really) return cars after around three years of monthly payments, and then take out a new plan on a new car. These schemes are operated by ‘finance providers’ that are normally attached to manufacturers, though for example the Financial Times (FT) [4 – there’s a link on the number, and full list of references at the end] report Lloyds Bank operating in this area in the UK (and also Santander in the US [2]).

On top of this is a second layer of financial engineering. Just as with housing, finance providers package up some of their loans and sell them on, in the process known as securitisation. In February the Guardian [1] observed: “Some of the car-leasing loans in the US and the UK have been packaged into asset-backed securities [ABS], to be sold on to investors such as pension funds”.

More recently the FT [3] gave some numbers: “During 2016, €4.8bn [that’d be ¼ million cars at price €20K] [to put it into perspective, total net lending from banks to all non-financial business in 2016 was only £15bn, and total consumer credit was £10bn – see here] of auto asset-backed securities were sold into the UK — the highest amount issued since the financial crisis, and more than twice the volume in 2015, according to data from Morgan Stanley. Across Europe, just under €18bn of auto bonds were placed in 2016 — a 50 per cent rise on the year before”. In America they are now talking about ‘deep sub-prime’.

So how does this process unravel? The Bank of England have emphasized the dangers of a collapse in second hand car prices and the impact on finance providers, who rely on reselling in the second hand market when customers return cars after three years. Further down the line come dangers to pension funds and other asset holders who have bought the securities based on these car loans if prices collapse, and ultimately passing the risk onto households.

But fundamentally it seems hard to understand how this was not always a likely consequence of a scheme built on asking people to buy seriously upgraded cars in the middle of living standards crisis. The flooding of the second hand market and fall in prices is an effect of the scheme – not the cause of its collapse.

But likewise there will be a corresponding reversal in financial markets. On the 3 July the FT [3] reported Andrew Dennis, a securitisation investor at Aberdeen Asset Management, saying: “We do identify it as a risk point, but it is for sure a brewing risk”. But they had already [2] reported the warnings of an expert on the US market: ‘“It’s a new mini-Big Short,” she says, alluding to traders who made billions by betting on a housing collapse a decade ago’.

Then at the end of July– again with echoes of housing – the FT [5] reported the ratings agencies catching up:

Moody’s has raised the alarm over a wide range of UK consumer loans that are bundled together and sold to institutional investors, underlining how anxiety over a deteriorating economic outlook is spilling into markets. Auto loans, credit cards, buy-to-let mortgages and so-called “non-conforming” mortgages that do not meet high street lending standards were among those that make up asset backed securities and were singled out by the rating agency for a negative outlook.

In the meantime, the impact of financing an increase in car production off the back of an unsustainable rise in lending is beginning to make itself felt in the real world, with a wide range of indicators suggesting that the automotive industry is struggling.

  • 10% decline in new car registrations

The latest (15 August) Bank of England discussion (‘Car finance: what’s new?’, strictly it’s on their blog, ’Bank Underground’), takes a “sharp” fall in demand for new cars as their point of departure. Society for Motor Manufacturers and Traders (SMMT) figures show new car registrations declining by 10% on the year, the steepest decline for at least five years. This is the Bank chart.

The authors also note that SMMT forecasts total new car registrations declining by 2½% in 2017 and a further 4% in 2018.

  • Steepest decline in motor vehicle production since the global recession

In the second quarter of 2017 manufacturing output was back in decline, by 0.6% on the quarter. Within this, manufacturing of motor vehicles declined by 5.8% (accounting for around ¾ of the total decline). The chart below shows the four quarter growth rate at -5.0% in 2017Q2, the steepest annual decline since the global recession.

Motor vehicle production, % 4Q growth

Source: ONS
  • Car retailing and wholesale grinds to a halt.

Aside from car production, car sales contribute to the UK economy through the activities of retailers and wholesalers (the ONS measure also includes services provided by garages). Between 2012 and 2016 annual growth averaged 9%; in 2016 Q2, growth was 0.6 per cent.

Retail and Wholesale of cars, % 4Q growth

Source: ONS
  •  Capital investment in motor vehicle (and engineering) industries collapses

In the year to the first quarter of 2017, investment in engineering and vehicles industries fell by 18.6%, marginally less terrible than the 24.1% decline in 2016Q4. The 2016 figure was significantly below the worse annual decline in the global recession. The suggestion is a severe failure of confidence in these industries.

Investment in engineering and vehicles industries, % 4Q growth

Source: ONS
  •  Exports in decline, imports on the verge

Registrations and retailing figures suggests domestic demand is contracting. In parallel imports of motor vehicles slowed to 2.5% in the latest quarter, having averaged 16% over the previous four years. But export growth has taken an even bigger hit, declining by 4.9% in the year to 2017Q2.

Trade, % four quarter growth

Source: ONS

This suggests a wider international decline, which is likely consistent with financial arrangements not being unique to the UK.

There are other things going on of course. For one imports and exports are partly related, with supply chains operating across more than one country. For two various other domestic factors are likely to be hitting demand, notably the fall in real wages but also behavior in response to the government removing green subsidies and putting up vehicle excise duty. Then there is Brexit, and the associated movements in the exchange rate and potential withdrawal of foreign direct investment. One point is clear, the fall in the exchange rate does not seem to be helping UK car manufacturers. 

  • Highest new car price inflation since 2011

In July new car price inflation of 3.5% was up 1.0 ppts on June, and the highest rate since 2011. Used car price deflation turned more sharply negative, with inflation of -3.1% in July following -2.3% in June, and the highest fall for six month. Rising prices for new cars might be an inevitable consequence of financing difficulties translating into rising costs (as well as the exchange rate). But they are unlikely to help the situation.

Car price inflation, CPI %

Source: ONS


These are very worrying developments. The strength of the car industry in recent years has been a significant success story of the British economy. It shows what can be achieved when demand is in place, even if fostered by ad hoc means – before financial engineering were the ‘scrappage schemes’ that governments put in place in the wake of the global recession. Even now, manufacturers continue to innovate. Ford have just announced a new scrappage scheme, offering cash incentives for trading-in polluting cars for purchase plans on new efficient, low-emission vehicles.

Something in all this seems very familiar. The Bank’s blog closes rather dismally.

As amounts of consumer credit increase, so do the risks to the finance providers. Most car finance is provided by non-banks, which are not regulated. These developments make the industry increasingly vulnerable  to shocks.

These inherent vulnerabilities in financial arrangements are plainly now having a impact on the real business of manufacturing cars.

Once more you are left knowing wondering why economic activity is hostage to (apparently unregulated) financial alchemy. The car industry proves that there is no shortage of capability in the real economy. There must be a different way to a stronger economy, one that permits higher demand, higher wages and higher production to go hand in hand in a sustainable way.

In the meantime, “Car trouble, oh yeah”.


[1] Sub-prime cars: are car loans driving us towards the next financial crash?, 10 February 2017, Patrick Collinson, Guardian

[2] Debt pile-up in US car market sparks subprime fear, May 30, 2017, Ben McLannahan, Financial Times

[3] Investors increasingly wary of car loan bonds, July 3, 2017, Thomas Hale, Financial Times

[4] Warning signs emerge in the UK car loan market, July 9, 2017, Emma Dunkley and Martin Arnold, Financial Times

[5] Outlook darkens for UK debt collateral, July 31, 2017, Thomas Hale, Financial Times


One Response to Car trouble? Sub-prime auto lending hits the real world

  1. James Griffiths
    Aug 25th 2017, 7:33 am

    So if the sales of new cars is in decline …. how is the second hand market going to collapse? There’s not the level of almost new second hand cars about, so they’re going to be at a premium. The knock on effect will be the second hand car prices will raise, even the 200 quid shed will rise in price. Or are we blaming Brexit for destroying the laws of supply and demand too?