From the Wealth section of The Australian 22 February.More from Glass’s Guide.
RECORD sales of new prestige luxury cars in 2005 means the bottom has dropped out of the second-hand market.
As a result owners with novated leases and hire-purchase plans will be forced to pay thousands of dollars extra on their balloon payments. Novated leases are the fastest growing form of car finance.
The attraction is that while the employer handles the car’s finances, once the lease expires – or the employee leaves the company – the employee becomes liable for the residual value of the car.
With hire purchase, people often opt for a balloon payment, to reduce monthly repayments.
This means that when the second-hand car market is buoyant the employee wins or, as now, when it crashes the employee loses.
“On average for the entire market, used vehicles drop 5 to 6 per cent,” says Nick Adamidis, national sales and marketing manager at the used-car bible Glass’s Information Services.
“But we had a 16 to 17 per cent reduction last year (in used car prices).”
He says that although the resale values of Falcons and Holden are down, hardest hit are prestige and luxury cars, especially BMWs and Mercedes.
“It’s because there is such a large volume of new cars being sold each year, and a lot of people are going into a new car because they are so cheap now,” he says.
“It’s basic demand and supply.”
When Tina Collins, a sales manager for a medical equipment company, bought her BMW 325i in 2002 for $74,000, she thought the resale value would be near $50,000.
She has a $19,000 car allowance and has been paying $1075 each month on the lease.
Today she is being offered almost $10,000 less than her balloon payment for it.
A BMW dealer offered her $42,000, a Subaru dealer $33,000. If she sold it privately she may get up to $39,000 for it.
KPMG tax practice partner Andrew Purdon says it is a cost that Collins will have to absorb either in increased lease payments on her replacement car, or by paying more cash upfront on her new model.
“Somehow she’s got to make that up,” he says. “This is the problem.
“Your (salary) package costs stay the same because the lease payments don’t change and your FBT doesn’t change. Your big issue becomes the residual value at the end.”
According to Glass’s, the situation is going to worsen.
One of the worst cars for resale value is a Saab, potentially leaving a $12,000 dent in the owner’s bank balance. A four-door Aero Sedan bought for $84,900 in 2001 was expected to depreciate to $36,507, 43 per cent of its retail cost.
Today it is worth about $24,261, 29 per cent of it original cost.
In 2001, a Range Rover Vogue worth $130,000 would have sold for $104,000 after one year.
Today that same one-year-old vehicle would sell for $84,500, leaving the owner with a $45,500 loss.
Purdon advises people to start sacrificing more salary and paying higher lease payments to get the residual down.
“Because if you dispose of it at the end you might make a profit on it, but at least you won’t make a loss,” he says.
Purdon, who last bought a new car in 1988, says: “It has happened before in the recession.
“With the bottom dropping out of the market, people are finding that they suddenly have to find some make-up money at the end of the lease. Which is a bit of a shame.”
As a remuneration expert, he reckons that most employees are still better off than if they had they bought a car with after-tax income.
He says the smart employee could choose a cheaper marque or a second-hand car. “I’ve waited until people have bought a car, realised they can’t afford it and then I pick it up in a big discount.”
Two years ago he bought a two-year-old five series BMW at a $30,000 discount. “It had dropped nearly $2000 every month. When you look at it that way they become an extremely good buy.”
Other good buys, according to Glass’s, are 7 series BMWs and most Lexus models, all of which can be bought for at least a 30 per cent discount after one year.
“From a salary packaging point of view it certainly provides more incentive for people to buy near new cars than new cars as part of their package.
“They can say `I’ve got this car that to me is worth $200,000 but I only paid 100,000 for it’.
“And those sorts of vehicles have been owned by people who usually have them fastidiously maintained.”
The term of a lease or hire purchase should ideally be less than a car’s warranty.
Glass’s Adamidis warns that after three years, when the warranty has run out, buyer beware.
“People are wary about anything breaking down regarding how expensive it will be to repair,” he says.
“They are less included to purchase a three-year-old Beamer or Merc than a Honda Accord or a Toyota Camry.”