Green shoots, a phrase coined by the Coalition Government as a byword for recovery. It seems that we may now be finally seeing the first of them pushing up through the heavy grey soil of recession. One of these, that is decidedly taller than some of the others, is being fuelled by the motor industry. The car leasing industry is growing within the sector at a very encouraging rate, but why?
The Confederation of British Industry (CBI) has recently raised its forecast for growth in 2013 and 2014. It now predicts a GDP growth of 1.2% in 2013, which is a .2% increase over its May forecast. 2014’s prediction has seen an even better improvement with the CBI now forecasting a growth 0f 2.3% up from its previous estimation of 2.0%.
Alongside these encouraging predictions for the overall economy the Finance & Leasing Association (FLA) reported encouraging growth in the leasing market. New business deals grew by 6% during July, thanks mainly to growing confidence from small to medium size enterprises (SMEs). Sales finance grew by a whopping 17% with commercial vehicle funding just behind it at 16%. Car finance grew by 5%.
However, such growth in the car leasing industry is not just limited to the UK. The US has seen such growth that leasing now accounts for a quarter of all new vehicle sales across the country. Throughout June of this year car leasing accounted for 25.7% of new car sales compared to just 17.5% a decade ago.
So What Is Powering This Car Leasing Industry Growth?
It is still very much up for debate why the new car market is growing so much in a still generally tentative market but the growth behind car leasing has a few attributable stimuli. Manufacturers certainly have a large part to play. With original equipment manufacturers (OEMs) predicting and applying higher residual values to their vehicles they are making leases more attainable.
Seeing as lease prices are calculated based on the difference between the vehicles new price and its likely value once the lease is over (amongst a few other variables) OEMs can make leases cheaper by increasing their vehicles predicted residual value and therefore reducing the difference between new and used cost. The Truth About Cars (TTAC) reports that a luxury European manufacturer has spent almost ten figures in an effort to cover a possible loss resulting from higher residual predictions in order to offer attractive leases.
However, luxury brands are not the only ones that are making hopeful predictions. Toyota has increased the residual value of the 2014 Corolla by 10% on the previous year’s model in an effort to reduce lease pricing. Using ALG data Toyota has predicted the new Corolla’s value at 3 points too high. If the ALG prediction proves true Toyota could lose $600 on every $20,000 car. This is the risk manufacturers are willing to take to buoy their new car sales in a tentative post recession market.
Post Recession Price Out
There is also the issue of average new car prices growing disproportionately to people’s salaries. With people literally unable to accumulate enough money to buy a new car they turn to other methods to allow them to obtain their dream vehicle. Couple this with an increase in used car prices, which can make them a less appealing prospect for some, and you have a situation where consumers are stuck. Some will turn to finance, and the resulting interest payments, and others to leasing (want more information about the advantages of car leasing? Then follow the link to our car leasing explained page.)
It is clear then that, despite the gap between real earnings and vehicle prices, people are still as mad about cars as they always were. The only difference is the way in which they attain their dream vehicle. Leasing is increasing in popularity due to its highly competitive pricing, helped along by the OEMs, in a market that is getting more and more expensive.
Written by Ryan Hill
Featured Image Attribution: ningunaparte
UK Cartoon Image Attribution: Alistair Marshall