Leasing Is History

Henderson Weekes sounded genuinely apologetic. He really did. The veteran salesman at Roy Foss Chevrolet in Toronto would have been only too happy to offer a lease on General Motors Corp.’s award-winning Malibu sedan when I inquired as to its availability this week. But he said his hands, like those of all GM dealers, were tied.

“Leasing is history,” he said. “Everything’s finance, finance, finance. No lease at all.”

But what if I don’t want to own the car? What if, like many of the roughly 40% of Canadians who choose to lease when getting a new vehicle, I consider a six-or eight-year relationship with the same automobile to be monotonous enslavement? Then “you’re in trouble,” he said.

Vehicle buying and selling in Canada is about to change after GM and Chrysler LLC signalled to dealers last month that their finance units will pull back on the subsidized lease rates they’ve been offering for years. BMW AG, which derives 60% of its Canadian sales through leases, is also back-pedalling on leases somewhat by offering a wider variety of purchasing options.

And Ford Motor Co. disclosed yesterday that its lending arm is planning to cut leasing of vehicles, although a Ford official said there will be no change in lease offerings in Canada.

The reason for the retreat is clear: The price of used vehicles has tumbled in recent months in the United States and Canada. That, along with credit-market pressures, has made leasing less economical for automakers than in the past. In particular, the value of large SUVs and pickups that drivers return to dealerships after their leases are over is now far less than expected, forcing the automakers who own them through their finance arms to set aside hundreds of millions of dollars in provisions against the declining residual values. Ford Motor Co. wrote down the value of its Ford Credit leased-vehicle portfolio by US$2.1-billion in its latest quarter.

Leasing, loved by some for its hooked-on-drugs quality that allowed Canadians to drive away with a car they might not be able to afford to buy outright, will almost certainly become less prevalent.

But industry executives say leasing is not going away.

“What leasing enabled people to do was to drive more car for less payment,” says Jerry Chenkin, executive vice-president of Honda Canada Inc., adding that the values of Honda’s used models have held up better than those of some rivals, and that the company has no plans to stop offering leases. Toyota Canada and Mercedes-Benz Canada says their leasing policies also remain unchanged for now.

“People could move up markets and up equipments for the same or less payment [than financing],” Mr. Chenkin says. “The only thing that will negatively impact that is if the payments increase significantly … in which case people will move down market or downsize.”

The percentage of people who use leasing is lowest in the Western provinces and highest in Quebec, where more than half of new-car buyers pick the option. And the types of vehicles being leased spans the spectrum, from trucks and luxury cars to cheaper models. Fifty-four per cent of higher-end

premium vehicles in Canada are leased, while 38% of non-premium vehicles are leased, according to 2007 data from J. D. Power & Associates.

“There’s quite a lot of leasing activity at the low end. Companies like Hyundai are very active in that area … People are looking for a lower monthly price point,” says Richard Cooper, executive director of J. D. Power & Associates in Canada. “We think consumer behaviour might change a little bit” as buyers shop around more widely for deals and more of them choose financing and long-term service contracts, he says.

At Bob Bannerman Motors’ Chrysler dealership in central Toronto, a salesman confirms leasing vehicles like the four-door Jeep Wrangler is still an option, but at an interest rate of 8.9% — much higher than the rates Chrysler has typically offered in years past. Lease rates for Chrysler’s Dodge Journey are even higher, topping 12%, according to one source. At that level, the automaker is potentially pricing itself out of the leasing market and risks seeing its customers go elsewhere.

But there are other options for consumers concerned about keeping their monthly car payments low, even if they will end up paying more in interest costs in the long term. Canadian banks such as Bank of Nova Scotia are offering loans as long as eight years to drivers wanting to buy a car or truck. GM is offering a deal of 0% financing over six years that comes with a $2,000 cash offer for those who switch from a GM lease. Chrysler has a similar offer.

“I think, for a lot of people and for a lot of clients that I have, this could benefit them because they’re now going to have the option to be able to finance over a longer period of time and own the car,” says Mark Derry, an auto advisor with www.carsense. to. Still, overall sales volumes are going to decline because dealers and manufacturers are not going to be able to sell consumers as easily on the long-term financing model, he predicts.

Drivers will demand leasing and the market will oblige, especially for luxury vehicles, says George Iny, head of the Montrealbased Automobile Protection Association, a consumer group.

Several independent leasing companies, such as Quebec-based firms Location Lutex and Park Avenue Leasing, have signalled they intend to negotiate with GM dealers in an attempt to woo their leasing clients. Lease Busters Inc., which matches people looking to get out of their leases with people wanting to take them over, says it is looking at “a windfall of new business” as the Detroit automakers pull back. Others consumers may simply shift to buying used instead.

“We think that even at a low interest rate, handcuffing you to a car for seven years is a recipe for a dissatisfied customer,” Mr. Iny says. “It’s absolutely cheaper long term to keep your car longer. But the industry has convinced people to change vehicles often. I don’t think those people are going to become frugal Calvinists because two carmakers have decided to take them off the gravy train.”

__________________________

NICHOLAS VAN PRAET

August 09, 2008

The Financial Post