Why are Britons buying?

UK car sales have been a surprising bright spot for Europe. (Atilla Altun/Getty Images)

New car sales in Europe are in an unprecedented swoon. Latest data shows a 5.6% year-on-year decline across the Eurozone.

And as more data is released, the situation remains dire. Just last week, struggling French firm PSA Peugeot-Citroën predicted further decline.There is, however, a European exception: Britain.

This may be the Isles’ second-best year on record. The Society of Motor Manufacturers and Traders (SMMT), the UK’s main automotive trade body, has just revisedits full-year sales figure upwards, after a 17th consecutive month of growth.

But why is Britain on the mend? After all, is the region’s economy not still strained?

It certainly is, and has been since 2008, but bizarrely, a unique set of conditions has created an environment where, for a number of consumers, buying makes good financial sense.

When the recession hit, many Britons stopped buying cars. Now running middle-aged motors, these consumers have awakened to maintenance costs that cast their machines as financial liabilities. (Forking out for repairs does not please austerity-tuned Brits.)

These consumers are ready to shop, and a range of reasons to buy awaits them. Because automakers have made such strides in fuel efficiency over the past half-decade, the fuel economy of a new car is a major selling point – as one might expect in a country with near-$10/gallon petrol.

Record-low financing rates of 0.5% is another factor making new car purchases more viable. And plans such as Personal Contract Purchase (PCP), where an end-of-term balloon payment keeps deposits and monthly payments low, means a new car is not the liability that it represented in pre-recession days.

Switched-on global automakers have rolled out UK-specific incentives to further goose sales, in an effort to offset losses elsewhere in Europe. They know motorists in the UK are buying, and are subsequently making sure their products, to keep the factories churning.

Then there are compensation payouts from the unique-to-Britain Payment Protection Insurance (PPI) mis-selling scandal, where banks sold PPI – intended to protect the purchaser if he or she cannot service the debt – to unknowing customers, prompting the Financial Services Authority to impose tougher rules. As a result, banks are obliged to pay compensation worth billions to victims.

“People have relatively small amounts of money they may have received from windfalls,” said Keith Lewis, the SMMT’s head of communications. But a way to maximise the benefit of these windfalls, however small, is to apply them toward a deposit on a new car, Lewis said. Many are doing just this.

The SMMT also cites the 2009-10 UK Scrappage Incentive Scheme. This brought 335,000 drivers of older cars into the new car market. Three to four years later, these drivers now must decide whether to stick with the car they have or jump to a new one. As the initial PCP expires, switching into a new vehicle at minimal cost is an undeniable temptation. Once on the new car ladder, why step off?  

Even British drivers who prefer to buy used are trading up. PCP cars are indeed coming onto the used market, but not in such quantities to satisfy the demand for good used cars. Simply put, there aren’t enough quality used cars to go round, pushing prices up and making them, bizarrely, comparable on price with factory-fresh cars in dealer showrooms.

And even with all this positivity, still the encouraging news comes. SMMT interim chief executive Mike Baunton this week said a range of economic factors had given the organisation yet more confidence. “Our raised sales forecast emphasises how positively we view the rest of 2013.”

Growing sales in a recession-hit market, with predictions of further growth – is there a more paradoxical car market in the entire world?