There have been a flurry of reports in the last day or so claiming that Brexit is responsible for driving up the price of cars and, even more so, the cost of PCP car finance. But is that true?
The media reports stem from a press release from automotive site Parkers, which came to the conclusion that it’s all Brexit’s fault based on a study of 14 different car models, comparing today’s prices with those from 2017.
Needless to say, the premise of a press release headline “Post-Brexit car price rises costing drivers thousands” had media outlets salivating at the clickbait opportunity to blame Brexit.
It’s certainly true that cars are becoming more expensive, and car finance is as well. However, there are a number of factors that are contributing to this. Some of these are Brexit-related, though some are not.
Exchange rate
One thing that we can definitely pin on Brexit is the falling value of the pound against other major currencies. This has made every car on the road more expensive, as every car on sale is either built overseas or built here using lots of imported parts.
A weaker pound makes buying anything in other currencies dearer. Since Brexit, the pound has fallen by 20-30% against other major currencies. How that will change after Brexit remains unclear, regardless of any deal (or lack of a deal).
Interest rates
Interest rates have been at historic lows for the past decade. The Bank of England lowered its official interest rate from 0.5% to 0.25% in August 2016, in the immediate aftermath of the EU referendum vote, but has increased it twice since then. The official rate currently stands at 0.75%.
That may not sound like much, but interest rates are now higher than they have been in a decade (since March 2009, to be exact). That inevitably has a knock-on effect on the cost of borrowing money on a PCP, as you pay more interest on every pound you borrow. And if cars are getting more expensive, it’s a double whammy.
Is Brexit responsible for interest rate increases? Well, the Bank of England sets rates in response to economic conditions and predictions. Increasing interest rates is one way of slowing borrowing, which is a sign that the economy is growing. Cutting interest rates is a way of stimulating a stagnant economy by encouraging borrowing.
Deposit contributions and deals
Rather than analyse the best-selling cars in the country, Parkers selected its own list of 14 cars from the hundreds of models on sale. How they chose these 14 cars isn’t explained, but inevitably there are variations in the deals that are being offered today compared to what was on offer two years ago.
In some cases, PCP payments have increased because manufacturers are no longer offering attractive deals on those models. For example, one car analysed was the Vauxhall Mokka X, which in January 2017 was offered with a £500 deposit contribution (effectively a discount if you take finance). Today that deal is no longer on offer, effectively making the car £500 dearer, which bumps your monthly payments up by about £10-£15.
The Fiat Panda is now significantly more expensive to finance than it was two years ago, yet the Fiat 500 is now cheaper to finance than it was two years ago, thanks to a £1,750 deposit contribution that acts to reduce monthly payments by £35-£50.
The Fiat 500 and Fiat Panda are similar-size cars, in a similar price bracket, use broadly the same supply chain, and are both built in the EU. So how is Brexit responsible for one of those cars becoming more expensive while the other one becomes cheaper?
The far more likely reality is that Fiat is no longer actively promoting the ageing Panda, which scored a dismal zero-star crash test result last year, with any consumer offers or subsidised pricing, and is throwing its resources behind the popular 500 instead.
Deals come and go based on the needs of each manufacturer to sell as many cars as possible for as much profit as possible. It’s not a Brexit thing.
Used car values
Used car values have been falling steadily all decade, which itself is a function of the growth of PCP finance. With car buyers essentially being forced into changing their car every three years, we saw several years of strong growth in private new car sales, peaking in March 2016. But the knock-on effect of that is that the market has become increasingly flooded with three-year-old used cars.
That, in turn, has meant used car values have been falling ever since. Given that PCP monthly payments are determined by how much value your car will lose during the agreement (depreciation), a combination of higher new car prices and lower used car values has made monthly payments considerably more expensive.
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There are specific situations where certain used car values are falling faster than others. For example, diesel cars are losing value faster than they used to as more customers are switching to petrol cars. That, in turn, is strengthening used car values for petrol models.
The overall market trend of falling used car values is continuing a pattern that goes well back before the EU referendum. So once again, not a Brexit thing.
Apples and oranges
Not only did Parkers select its own list of 14 cars from the hundreds of models on sale, curiously, the Ford Fiesta is absent despite being the country’s best-selling car for a decade.
There’s also no mention of the Volkswagen Golf, Vauxhall Corsa, Nissan Qashqai, Volkswagen Polo, Mini hatch, Mercedes-Benz A-Class, Ford Kuga or Kia Sportage. In other words, nine of the ten best-selling cars in 2018 (and mostly in 2017 as well) are not included.
The report only mentions one car in the top ten, which is the Ford Focus – and that car is significantly cheaper now than in 2017. Instead, the 14 cars Parkers has chosen to analyse include the Fiat Panda, Hyundai i10, Peugeot 108, Suzuki Celerio and Vauxhall Viva – most of which are about as popular as leprosy.
It’s also inevitable that many of the cars that were on sale in January 2017 (the starting point for the report) have been replaced by newer models in the last two years. Even the ones that have been on sale for that whole period have been upgraded or repositioned price-wise as manufacturers look to maximise sales and profits. Engines, specifications and, inevitably, prices will have changed over that time.
By cherry-picking a handful of cars to project your assertions across the entire UK new car market, you leave yourself open to accusations that you’re choosing cars to suit your ‘let’s blame Brexit’ headline rather than actually analysing the real situation.
Some cars are significantly cheaper
The flipside to the above point about model cycles is that some cars are absolutely getting cheaper to buy as they get older. Manufacturers and dealers are constantly introducing new deals to try to shift older or less-popular models. It’s an inevitable part of the business, and there are always deals around – even if they’re not on your preferred new car.
The Fiat Panda might be more expensive now than in 2017, but the Fiat 500 is currently cheaper than it was two years ago. Fiat will have its reasons for this, but it’s unlikely to make those reasons public. Next month, there might be a fabulous new offer on the Panda instead.
There are also cases where cars have become significantly cheaper even though they have been replaced by all-new models. For example, the all-new Ford Focus, launched last year and a significantly better car in every way than the previous model on sale in 2017.
Fairly inconveniently for the thrust of the report (not mentioned at all in the press release, but included down the bottom of the article on the website itself), it turns out that the brand new Ford Focus is actually available on a PCP for about £30/month less than the old one that was on sale in 2017, despite heavy discounting that was going on two years ago.
Summary
Brexit is causing considerable uncertainty for businesses and consumers, and that’s bad news for everyone. However, it is currently very fashionable to blame Brexit for anything and everything bad without looking at the wider picture.
Car prices are going up for a number of reasons, and Brexit is a factor in some of those reasons. PCP monthly payments are going up largely as a result of car prices increasing, but also as a result of falling used car values caused by the popularity of PCPs in the first place.
As much as we are all consumed by Brexit at the moment, the global car industry is grappling with much bigger issues. Brexit is probably not even in their top ten list of problems. It’s probably not even the biggest issue facing the British car industry.
The main issue with Brexit has been the horrendous way that our elected political leaders, from all sides of the argument, have managed the process of Britain leaving the European Union. Nobody in the car industry wants a no-deal scenario, but if that’s what’s going to happen it would have been better to confirm that a year ago rather than the day before we leave.
