What Car? notes some significant price increases in the last twelve months: Ford Fiesta 1.25/60 up 32.6%; Ford Mondeo 1.6/110 up 19%; Fiat 500/1.3 up 17.6%; Ford Focus 1.6 up 17.6%; and Vauxhall Insignia/2.0 up 17.2%. In addition, What Car? reports that dealer discounts have been falling.

These are clearly substantial price increases and What Car? mentions the weakness of the pound generally and against the euro in particular. Since the introduction of the euro, one pound has bought 1.5 euros, but today it only buys 1.1 euros. This means that a new car coming off the line in Europe valued at 10,000 euros used to cost us £6,700 but now it's £9,100, which is an increase of 36%. So it's surprising that new car prices haven't increased even more and perhaps they will. Obviously we manufacturer a large number of cars here in the UK, but this doesn't help because most are exported.

There are also many other factors pushing up the prices of new cars both here and in Europe. The oil price is probably one of the biggest because it affects manufacturing and transportation costs. Before 9/11 the oil price had been fairly stable at less than US$30 per barrel since the mid 80s. After 9/11 oil prices increased considerably with, in the last twelve months, Brent Crude up from $45 to $75.

For new car buyers 'affordability' is the key and one way of assessing this is how long it takes 'the man on the Clapham omnibus' to buy a new car. In 1976 when the Ford Fiesta first went on sale the entry level model cost £1,860 and national average gross pay was £3,750 - so it took six months of gross pay to buy a Fiesta. Right now the entry level model Fiesta is £11,500 and the latest average gross pay (April 2009) is £26,470 and thus it takes 5.2 months. However only a few years ago (2006), the entry level Fiesta cost £8,300. So with national average gross pay of £24,134 in that year, it took 4.1 months to buy.

From this perspective, 'affordability' of new cars could have been adversely affected in a very short time and even more so when you consider the lack of cheap credit. If the pound doesn't grow stronger, the recovery of new car sales could falter unless private and company buyers are willing to downgrade.

Written by Trend Tracker director Chris Oakham, this piece first appeared his column in the subscription monthly Auto Retail Bulletin in March 2010. (See www.auto-retail.com for subscription details.)

Chris Oakham

Trend Tracker Limited

0870 421 4350

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On 5th November a BBC online news item entitled "Scrappage sees UK car sales surge" reported that new car sales had recorded their biggest increase so far this year in October, helped by the scrappage scheme. "Encouragingly, there has also been an increase in demand in the fleet and business sectors, which will be critical in sustaining recovery next year," the BBC reported SMMT chief executive Paul Everitt saying.

On 11th November, another BBC online news story reported, "UK trade gap widens in September". The UK trade deficit widened more than expected in September, it said, led by a jump in car imports as Britain's scrappage scheme helped foreign carmakers. The difference between what the UK exports and what it imports was £7.2bn in September, well above analyst expectations of a £6.1bn deficit. September's overall trade deficit was the biggest since January.

Who'd have thought that one might cause the other?

Discussing the scheme, Auto Retail Bulletin's May issue helpfully notes that when it went live on 18 May, it was still not clear how HMRC would treat the VAT involved in the scheme, particularly where it may involve VAT-registered light commercial vehicle dealers who would not normally pay VAT at the point of sale.

The scheme has been introduced with an apparent lack of joined-up government among the government departments and agencies involved, and with apparently an at best lukewarm blessing from The Treasury. As Professor Garel Rhys has noted, it stands to boost the sales of a number of dealers, but only those of Nissan among the UK's remaining car plants, since 86% of UK-sold new cars are imported, and the rest are all far beyond the reach of those who've made do with old bangers.

Some of us think all scrappage schemes are market-distorting and create sated consumers to dampen a future recovery based on consumer confidence in paying real, sustainable market prices. At least in the UK scheme's case, it hasn't been clouded with dubious claims of environmental benefits. And we can take comfort from the modesty of the UK scheme. The Germans have spent €2.5bn on allowing clunker owners to swap ancient Polos for cheaper new Porsches should they wish, and they can buy them in Poland if they prefer.

While we estimate that if the average price of a scrappage incentive-driven new car purchase in the UK is £8,500 or so, the Government's £3,000,000 budget for the scheme will be more or less recouped by VAT receipts that HMRC would not have had without the scheme. So at least the rest of us won't have to pay for other people's new cars.

Toby Procter
18 May