It's Not Just Americans, Europe's New Obsession With Auto Leases Is "Catastrophic For Used Car Prices"

We've spent a lot of time of late writing about the pending collapse of the U.S. auto bubble.  When it comes, that collapse will, at least in part, be due to the fact that over the past 6 years, new leases, as a percent of overall car sales, have soared courtesy of, among other things, low interest rates, stable/rising used car prices and a nation of rental-crazed citizens for whom monthly payment is the only metric used to evaluate a "good deal"...even though leasing a new vehicle is pretty much the worst 'deal' you can possibly find for a rapidly depreciating brand new asset like a car...but we digress.

Of course, what goes up must eventually come down.  And all those leases signed on millions of brand new cars over the past several years are about to come off lease and flood the market with cheap, low-mileage used inventory. 


By the end of 2019, an estimated 12 million low-mileage vehicles are coming off leases inked during a 2014-2016 spurt in new auto sales, according to estimates by Atlanta-based auto auction firm Manheim and Reuters.

Auto Leases


And, of course, that kind of supply increase will take it's toll on used car prices...with Morgan Stanley recently noting that used car prices could drop by up to 50% over the next 5 years.


But apparently America's "rental society" is rubbing off on Europeans and it has some auto ABS investors across the pond a bit worried about what it might mean for used car prices.  Here's more from Bloomberg:

“If there’s a steeper decline in car values, then borrowers will be incentivized to return their vehicles and it will be bondholders who bear any losses,” said Aaron Baker, a London-based credit analyst at Banco Bilbao Vizcaya Argentaria SA. “This exposure to used-car prices could be catastrophic.”


While residual values have been securitized in the U.S. since at least the 1990s, Europe is now catching up. The number of transactions backed by residual values in the region rose to 14 in 2016 from just one in 2009, according to UniCredit SpA.


Almost 80 percent of the 6.2 billion euros ($7.1 billion) of auto-debt securitizations sold in Europe this year included cash flows from residual car values, up from 47 percent in 2012, according to data compiled by JPMorgan Chase & Co. In the U.K., deal exposure last year rose to as much as 55 percent from less than 20 percent in 2015, UniCredit data show.


But it's not just leasing that's taking seems that Europeans have generally embraced the creation of their own consumer credit bubble with 85% of cars now being financed versus only 50% back in 2009.

The trend toward securitizing residual car values is also being fueled by a rapid expansion of consumer credit. More than 85 percent of new cars in the U.K. are now financed, up from just over half in 2009, according to data from the FLA trade group. Most of that debt consists of so-called personal contract purchase agreements, which are similar to short-term leases and encourage buyers to return cars at the end of the contract.


That’s putting downward pressure on second-hand car prices, according to Moody’s Investors Service. It’s also increasing household borrowing, making automakers and consumers more vulnerable to any increase in interest rates.


“There’s no guarantee that actual residual value cash flows will match the expectation,” Moody’s warned in its rating of a Volkswagen AG deal in March.

Of course, we all know how this movie ends.  So, to our European friends, enjoy the centrally planned credit bubble while it lasts because when it all comes crashing down it is slightly less than pleasant.


38BWD22 Haus-Targaryen Sat, 07/01/2017 - 15:02 Permalink

  We have been tourists in Europe for almost three weeks (N Italy, now in Grenoble, France).  Maybe it's just coincidence (or laws), but almost all of the TAXIS we have taken have been rather nice, rather new cars.  Not pieces of crap like we often have to take in the US.If these high-quality taxis are indicative of European leasing (and I don't know), then "Houston, we have a problem."

In reply to by Haus-Targaryen

Teja 38BWD22 Sat, 07/01/2017 - 15:24 Permalink

Hey, the fact that you have survived 3 weeks in Europe (especially Italy and southern France) will irritate most ZH readers. You must be incredibly lucky!Maybe the taxis are just better maintained than in the US. I remember a taxi which was still operating after 1'000'000 km in Stuttgart, Germany. The seats were a bit sagging, though, but not more than I remember from New York taxis.

In reply to by 38BWD22

thisandthat 38BWD22 Sat, 07/01/2017 - 21:04 Permalink

Mercedes has traditionally owned the taxi (and civil contractor's, but that's another story) market, in Portugal, from before the CAD/CAE/CAM times (from 60s up), when they really were on a another level, build quality wise, from other manufaturers, having topped at over 90% of market share.Though they're probably below 50% nowadays, they're still the favorite brand, typically C or E-class, maybe even S for premium (T)ourist cars, and if you buy them direct from Mercedes, in Germany, they're practically new, older model cars, as they replace everything that isn't up to standard, before putting them up for sale.It also helps that they don't pay auto tax, which can double, triple a car's price tag, at the higher end, and that they can sell them 5 years down the line at a premium, if they take good care of them in the meantine.

In reply to by 38BWD22

Funn3r 38BWD22 Sun, 07/02/2017 - 07:16 Permalink

To get a taxi license in Europe where I live your vehicle has to meet certain criteria which mean basically that it has to be clean and good condition and no more than n years old. Don't know about N. Europe but it's probably the same there which is why you found taxis were not shit buckets. 

In reply to by 38BWD22

EddieLomax DJ Happy Ending Sat, 07/01/2017 - 17:48 Permalink

It is a perfect storm, companies will have to raise car (lease) prices just at the same time that used car prices are so low they disuade people from buying a new car.The obvious solution will be cash for clunkers mk2, in Europe I expect it to be disguised as a movement to cut down on number of diesel cars.However, there is a difference this time.  Countries like France are flat out broke, even better they are anti-American right now due to their dislike of Trump, so they will be constrained as to how much they can borrow without fed help.  Add the cherry on top, Britain leaving the common market and its going to be interesting for France and Germany.  If the UK government are smart they will give the US a way out of their car problems by opening the UK market up for 0% tariffs in return for 0% tariff trade into the US, the glut in US car production could be eased by exporting. Macron and Merkel will have some explaining to do, but on the bright side Macro should by then have cornered all the climate specialists to work in France....

In reply to by DJ Happy Ending

Funn3r EddieLomax Sun, 07/02/2017 - 07:23 Permalink

Excuse me the UK already has a car glut we definitely do not want even more 0% cars from the USA glut. Also, don't know how the quality is now for cars in the US market but traditionally Europeans have hated driving them. You also have to remember auto transmission is pretty much a minority here so might need a bit of retooling for that. 

In reply to by EddieLomax

Lumberjack Sat, 07/01/2017 - 14:49 Permalink

A good lot of us with solid work and other ethics (and talents) don't mind buying cars (trucks) for pennies on the dollar and fixing them ourselves. Thanks!

Memo to liberal arts folks. You R fucked....some folks will be happy to have you paint a smiley face on a spade....then have you dig ditches with your work. In fact, the last administration has already set that in motion. Congrats!

Oh, btw, we ain't paying the bill either. Goes both ways.

Dre4dwolf Sat, 07/01/2017 - 14:43 Permalink

Getting into debt , to buy a car, that will depreciate faster and faster every year.Pretty stupid financial decision.You just wait and buy a new used car, spiff it up a bit and its fine, and it will cost you pennies by comparison.But why keep reporting crashing car prices? We know you can pickup almost any car you want used for 2-8,000$ 

directaction Sat, 07/01/2017 - 14:46 Permalink

Leasing a new car is a good financial decision for those who do not drive much, less than 1,000 miles a month. With a zero (or near-zero) interest rate combined with a sub-$20,000 capitalization (basic Jetta or Corolla) and a high residual it's basically a three-year, $6/day or $7/day fully-guaranteed test drive. 

Lumberjack directaction Sat, 07/01/2017 - 17:13 Permalink

So are you suggesting that we more frugal and talented folk get taxed even more for wire and duct tape? The cash for clunkers thingy worked out well, didn't it?

I am opposed to riding an ASS to work. The company logo looks like hell. I'm also tired if shoveling their shit as fast as I can while they complain that I left the barn door open... Wait a minute....what happens if I plug one of them in?!

In reply to by directaction

WileyCoyote Sat, 07/01/2017 - 14:53 Permalink

I don't agree with the author - leasing at the right price, and believe me, dealers are willing to deal - is not bad versus buying / financing at least for the new car route. I have put nothing down on cars worth > $35k retail for $200 a month - for 36 months. Dealer paid for all oil changes and I got 14k miles included per year. Why would I buy again - either used or new? Have been a long term car owner for years but the math is virtually the same and you need to drive the same car for years and years to break even versus leasing. I guess on the plus side, if used car prices do come down, those may be worth the investment.

Teja WileyCoyote Sat, 07/01/2017 - 15:29 Permalink

Leasing companies are giving young jobless men sweet deals for expensive sports cars. This comes up each time when a public road race in an European city ends with innocent people killed. I don't know how it works economically for the leasing companies, but it seems the car industry tries to cram their products into the market to make sure their factories do not run idle. Criminals.

In reply to by WileyCoyote

_SILENCER Sat, 07/01/2017 - 15:04 Permalink

It's all about buying CPO lease returns. Warranty up to 100k, previous renter usually dealer maintains to prevent voiding their lease contract and doesn't abouse the machine as the penaties will cost them fat stacks.Swoop in at year's end when they want to get shit off the lot, get something a couple models years back with 15K on it for a fuck ton less than new.Do an ECU tune and some other goodies, and you have a great machine for a lot less. ....unless you're an idiot and do a 72 month "loan".

ThrowAwayYourTV Sat, 07/01/2017 - 15:06 Permalink

Leases suck! You never feel as though you own the car/truck and every turn you make brings up the question in your mind, "OMG! what happens if I put a scratch on it.Then when its time to turn in, everybody, and I mean everybody is over the miles and the tires are bald.Listen up people! NoBODY Does ANYthing For YOU! No matter how good it sounds, you can be damd sure it benefits the other guy. Not You!

itstippy ThrowAwayYourTV Sat, 07/01/2017 - 18:25 Permalink

Wisconsin weather beats the shit out of cars' appearance, especially winter.  Salty slush gets ground into the floor mats, scraping crusted snow off the car scratches the paint, interior plastic trim & dashes get inflexible and crack in the extreme cold,  frozen door handles break right off, etc.  Leasing or buying a new luxury car or truck for your daily commuter is an act of lunacy in this climate.  True car guys have a really nice ride in the garage and a "beater with a heater" in the driveway.  Sane people buy a solid, dependable, boring vehicle and drive it year 'round.  There is NO WAY to keep a daily driver looking good in this climate.  Maybe you can in Southern California, but not here.

In reply to by ThrowAwayYourTV

BunkerZee Sat, 07/01/2017 - 15:10 Permalink

Stop with the endless teasing - get on with the used car price collapse! Some of us do not belong to the FSA (Free Sh*t Army), and cannot afford a new car every 2 years.

css1971 Sat, 07/01/2017 - 15:22 Permalink

One of my friends leases. Not interested in owning. New car every 2-3 years. All he does is pay the lease, fuel, insurance and tickets. Couple of hundred euros a month. Lease company handles everything; services, breakdowns, replacement vehicles.