Auto stocks stall as US skids toward used-car crisis
Rising subprime loans, plunging vehicle values portend possible debt spiral
YUSUKE MATSUZAKI, Nikkei senior staff writer
TOKYO -- Shares of Japan's top carmakers appear stuck in the mud amid growing concerns over the U.S. auto market's rising debt and high rate of subprime lending, problems that threaten to put a big dent in Tokyo stocks.
The Nikkei Stock Average remained near its 2017 high on Thursday, edging down 0.14% to 20,110. But shares in big-name Japanese automakers including Nissan Motor and Toyota Motor have generally been lackluster and are down for the year to date.
There is an element in the U.S. auto market investors haven't noticed, warns Adam Jonas, a noted analyst with Morgan Stanley. The problem lies not with new cars, where unit sales have begun to slump, but with used ones. Over the next five years, Jonas has said, used vehicles likely will lose about a fifth of their value in his basic scenario, or as much as half in the worst case.
The reasons are manifold. Rental cars, as well as previously leased cars -- which have grown in number on higher demand from individuals -- will soon roll into the used-car market in force. Moreover, the next five years should see more advances in auto safety than there have been in the last century, says Jonas, such as from advanced driver-assistance systems. The appeal of used vehicles would be tarnished by comparison.
More than 40% of loans in the market for auto-loan-backed securities are now classified as subprime, meaning they were made to borrowers who may have trouble repaying them. Borrowing periods are also growing longer, and the practice of borrowing to buy a car is expected to decline, putting more downward pressure on prices.
In the U.S., used cars are like currency in that consumers trade them in to help buy another vehicle. If the $2 trillion used-car market lost half its value, it would effectively wipe out around $1 trillion of that currency.
Sometimes a car's trade-in value fails to cover the outstanding balance of loans the owner took out to buy it -- a state called negative equity. Last year, record levels of people buying new cars -- over 30% -- did so with negative equity on previous loans, piling debt onto debt.
Negative equity on mortgages spread throughout the world during the financial crisis of the late 2000s, but mortgages were tied up in complex financial products and distributed the world over. Auto loans are smaller in scale, and likely will not retrigger that meltdown.
Yet the subprime auto loan problem may hit consumers hard, and market players feel a growing sense of urgency. The increase in debt could deflate cars' purchasing power and drag down used-car prices, further expanding negative equity in a losing spiral.
The new-car market would likely take the brunt of the hit. Morgan Stanley sees the U.S. market's annual sales of over 17 million vehicles sliding to 15 million in 2019. Previously leased cars will flood the market like a tsunami and drive down purchases of new vehicles, says Makoto Ono, senior economist at the Mizuho Research Institute. If new-cars sales decline, "the impact on consumption will be large, because factory production will slump," Ono said.
The apparent growth in the U.S. auto market came as a result of long-lasting low interest rates, says a senior economist at Mitsubishi UFJ Kokusai Asset Management -- an assessment that also rings true for sectors including commercial real estate. The Japanese stock market does not appear worried by interest rate hikes by the U.S., but the day may come when it realizes sputtering auto stocks were a blinking light warning of trouble ahead.