Negative equity - in the used car market

2008 was a year of sustained price deflation in the used car market. As our chart shows, the index of prices for second hand cars fell sharply and, in a second illustration of the weakness of the market place, there was a huge fall in the proportion of original new car price retained. By December 2008 this rate of depreciation had fallen to 33% for a car averaging 39 months and 42,100 miles - in other words, a new car lost two thirds of its original showroom value within three and a half years.

Activity is strong in the motor auction halls as thousands of used cars come up for sale having been ditched by their owners. Some of these fire-sales are the result of a slashing of spending on fleet cars by larger businesses including car rental companies. Others are attempts by motor finance companies to claw back some of the bad debts that they have made with car buyers having reneged on their vehicle purchase loans. Negative equity in the car market is becoming more frequent.

This article from the Telegraph explains the problem

“Buying a car is often a family’s biggest financial transaction apart from home purchase. Thousands of motorists try to spread the bill through a system known as Personal Contract Purchase. This entails putting a deposit down and then paying monthly installments for two or three years, before having the option to buy the car outright. The final payment – known as a balloon payment – is based on what the car is expected to be worth at the end of the contract. But the collapse of the second hand market has meant that the amount demanded by finance companies is often far more than the car is actually worth.”

A strong and active used car market is important for sellers of new vehicles because prospective buyers of a shiny new car want to know that the value of their big-ticket purchase will not collapse like a deck of cards within a few months. But with wholesale and retail credit for financing car purchases much harder and more expensive to maintain. And with unemployment on the rise and consumer confidence remaining exceptionally low, there is little chance of a recovery in demand and prices for used cars during this year of recession. Thousands in negative equity on their cars

Thousands of drivers who bought cars on hire purchase face ‘negative equity’