Friday, November 13, 2009
WHO really needs to buy a new car? Needs to buy one, as opposed to wanting to do so. This difference is one of the central dilemmas facing the beleaguered Irish new car sales sector at present as it seeks desperately to persuade people to buy.
New cars are a luxury. They are lovely to have — for as long as that new car smell lasts — and are full of extra features that give the impression of improved safety (and some of which deliver that, as long as you don’t go too fast) or which improve "the driving experience".
Look at all of the advertising that supports the sale of new cars: they are supposed to make your life better.
The bigger and more luxurious the car, the more of a statement that makes to others about your status in life (if such things are important to you). You might even get where you want to go faster without killing yourself.
But new cars are very expensive, especially in Ireland where very high rates of VRT are applied, as well as VAT, making them very costly by European standards. New cars lose value as soon as they are registered and driven out of the forecourt by the first owner. They cannot increase in value (apart from exceptional cases that don’t really matter) and the price that can be achieved in a subsequent sale falls year after year.
In the recession, prices of second-hand cars have fallen dramatically, which means there is extraordinary value available to those who have ready cash or remain in favour with their banks.
Buy a new car when such value is available? And with borrowed money? Why would anyone buy brand new when such great deals in nearly new or relatively new cars are available?
The used car lots are full of cars that lenders have repossessed — the financial institutions want to get cash in as quickly as possible, instead of keeping in lots cars that fall in value day by day and, as a result, some extraordinary deals are available apparently.
Despite this apparent value many people are opting to stick with what they have anyway, further exacerbating the crash in values in the second-hand market. The prices of some older cars are so low it is not worth the hassle of selling them or trading them in, even though they are roadworthy.
Cars that might have been traded at three or four years are being held now for five or six and instead of replacing with a new model, a two-year-old might be quite acceptable. But why buy anything at all, new or second-hand, when you can’t get rid of what you have already? Most old cars are perfectly good and up to the job required. Most of those made and purchased since the last years of the last century are comfortable and fairly safe and provide reasonable fuel efficiency (which is very important to the hard-pressed motorist). The "investment" involved in a buying a new car may not provide sufficient "returns" by way of reduced daily motoring costs.
In recent years many people have borrowed heavily to buy cars — not having the cash to buy one outright — and are making monthly repayments for anything between three and seven years, the interest to the bank loans adding even further to the expense, long before insurance, motor tax and running costs are taken into account.
What surprises me is that nearly 60,000 new cars have been purchased this year. Although that level is the lowest since the dark days of 1987, it is still a significant number.
Many people do not want to be seen with a new car because the signs of the prosperity that such a trophy represents are resented, even if they could afford it — yet that number has been bought still.
Some I suspect were purchased to show confidence in the economy. Many may have been purchased by employers because of prior commitments to the employees or contractual and/or business relationships with the car dealers.
But it is an enormous difference from what went before. There were 186,000 new cars registered in 2007 and another 152,000 in 2008. Those were enormous numbers given a working population of less than two million people.
Many of the purchases were unnecessary: the former German ambassador to Ireland, Christian Pauls, in a damning speech he made at the height of our economic folly and hubris, pointed out that people in Germany bought a car and drove it for an average of eight years before changing it. Here in Ireland we changed every couple of years. This level of sales was unsustainable, especially as we were gorging on borrowed money.
There have been major implications for the state finances, with VAT and VRT falling by two-thirds over the past two years.
The state has also had to fund social welfare payments for more than 10,000 people who have lost their jobs selling cars. The Society of the Irish Motor Industry (SIMI) reckons that unless something is done another 10,000 jobs will be lost, leaving about 25,000 in employment.
Those who remain may find that their income is much reduced. Many companies engaged in trading cars have been closed or required enormous financial restructuring.
The SIMI has a plan that is receiving some political support. It believes that for every €2,000 subsidy given to the purchase of a new car, it is possible to get a benefit to the state of €7,000, or a net gain of €5,000 per car. It believes it is a way of generating VRT and VAT that would not arise otherwise and of saving the state the social welfare costs of those who would lose their jobs.
Finance Minister Brian Lenihan told Fianna Fáil TDs at a parliamentary party meeting on Tuesday that he will consider the introduction of a so-called scrappage scheme as part of his budget measures.
THE minister came under pressure from about 30 TDs, led by Sean Connick and Michael McGrath, to do this. He may even give them what they want.
However, there is no guarantee that such an idea would work because of the lack of availability of bank finance and the fear of taking on new debt. It could end up as a €2,000 subsidy to people who would have bought new cars anyway, without encouraging anyone who would not have bought one to do so.
There might be more merit in such an idea if the cars being sold were manufactured in Ireland, but they are not: all are imported, so this would be an indirect support using state money for overseas industry.
What such an idea would also do, if it worked, would be to increase personal borrowing again, providing a new flow of personal business for the banks, if they want it. It might be better if limited bank finance was lent to productive businesses instead of increasing personal indebtedness. The SIMI and the TDs who seek support for motor dealers are well intentioned but may fail to appreciate the cultural shift against debt that is taking place.
Reducing debt is the priority, not taking on new loans that have to be repaid. That is why new car sales are likely to remain at low levels for some time to come.
The Last Word with Matt Cooper is broadcast on 100-102 Today FM, Monday to Friday, 4.30pm to 7pm. His recently published book, Who Really Runs Ireland?, remains in the top three of the country’s non-fiction bestsellers.
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