The Great Diesel Debate
- 28 September 2011
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Much has changed in the motoring world since the advent of a new CO2 based road tax system and for the most part it has spectacularly backfired. Forget that the Green Party have been permanently sat on the bold step outside Leinster House and forget that once upon a time the bank manager in our local branch greeted us with a smile and a wave with one hand and a fist load of Euros in the other. It’s all irrelevant in these austere times and too much retrospective thinking can distract us from the current issues confronting us. The rise in popularity of discount voucher sites and incentive based marketing by leading global brands has everyone chomping at the bit for a great deal so why is it, that when it comes to selecting a used vehicle, many of us are still getting it so hopelessly wrong?
Before I put forward some pretty big claims let me first acknowledge that for most of those privileged enough to purchase new vehicles and trade them every 2-3 years, diesel is a very attractive option as going forward, these vehicles should enjoy a greater residual thus reducing the cost to change. The price differential between the two fuel types when new has greatly reduced and so it’s easy to see the attraction of a new diesel car. Manufacturers are only now beginning to roll out some new petrol models with equally low emissions as their diesel cousins and it will take time for customers to readjust to what exactly is the best vehicle for them such has been the level of confusion in the last three years. Furthermore the previous government not only endorsed but incentivized the trading in of petrol vehicles with a view to eventually phasing them out in favour of diesel. Dealers countrywide would much prefer a yard full of diesel stock than a balance of stock weighted in favour of petrol models. And with diesel hybrids on the horizon, claiming as much as 85 mpg, the future is certainly “black-pump” tinted. Lastly, in diesel models defence, the used car market of tomorrow will be dominated and characterised by desirable stock which is far removed from the industry in the previous number of years which was turned on its head and saw some models rendered as simply unpalatable. All of this created an unpredictable used value atmosphere where the gaps between popular and unpopular became so substantial that dealers were left trying to sell large volumes of undesirable stock to a vastly reduced buying public.The focus of this piece, therefore, largely concerns vehicles 4 years and older.
We have in this country, resorted to what has been termed “buying the road tax”. In July 2008, the motor industry had a new table of road tax rates to learn and operate from. It was smaller than the previous model but with a far greater impact. Overnight some models in dealer’s ranges were effectively finished. Increases in their hundreds were applied to the yearly road tax of some of the popular household names and for once, a car, irrespective of its size could bestow a road tax price tag which was a fraction of its predecessor. Along with the general economic collapse, the market went into free fall taking a number of casualties along the way. Those who survived, and I sincerely consider it survival such was the gravity of the situation, were faced with a vacuum in the market which is still only slowly beginning to be filled. Manufacturers frantically produced low carbon emmitting models and dealers were eager to stock a vehicle which, as well as the obvious price reduction due to a lower level of VRT, also bore the holy grail of road tax rates, the €104 annual fee. Today, many larger executive saloons fall into the second road tax category of a €156 annual charge and apart from savagely reducing the amount of revenue earned through road tax, the Greens decision has led to a complete anti-petrol mentality in terms of buying a used car. This is inherently wrong for quite a number of reasons. And before anyone plays the green card, let me plainly state that I have no doubt that for most customers the decision to purchase a diesel car is overwhelmingly a fiscal one and not an environmental choice, whatever their justification.
Firstly, as a nation, we have always loved our petrol cars. The pre-2008 figures speak for themselves. In 2007 almost 3 out of every 4 cars sold were petrol. Four years on and those figures are practically reversed. If we consider that the average driver’s annual mileage has remained largely the same as it was in the early millennium, the argument for purchasing diesel becomes a little watered down.
Secondly, the road tax rate is just one consideration in the overall decision making process when purchasing a used car. Some vehicles in the family saloon range have seen variations in values from petrol to diesel in the order of €3000 to €4000 for a 2 year old vehicle. If we assume the typical diesel vehicle enjoys a road tax rate of €156 and its petrol cousin a rate of €450, it does not take a mathematician to see that it will take circa 10 years for the diesel owner to break even with someone who chooses petrol. Ok, so this is only part of the picture. There is also fuel efficiency to factor in and in this respect diesel cars win hands down. The rebuttle to this is to then state the obvious difference in the terms of the monthly repayments to the finance which was borrowed to fund the initial purchase the vehicle. If used diesel cars cost circa €3000 more than the petrol equivalent then this has obvious repercussions on any terms of a finance deal and the liability to the customer. It’s not so straightforward now is it?
Take this very basic but highly realistic scenario. John buys a 2008 petrol saloon for €15,000. David buys a diesel equivalent for €18,000. They both do 16,000 kilometres per annum as they have always been petrol drivers in the past, but David now adopts the new “diesel saves money” mentality. John pays an annual road tax charge of €450, to David’s €156. David gets 1000 kilometres to every fill of €80 and thus spends €1280 per year on diesel. John only manages 600 kilometres from his vehicle and so must fill 26 times per year at a rate of €80 per fill, resulting in an annual fuel bill of circa €2150. In comparison, David saves €300 per annum in road tax and €870 per annum in fuel giving a total saving of roughly €1200 per annum. Therefore it will take David 2.5 years to break even with John ie: €3000 output divided by a saving of €1200 per year = 2.5 years. I have not added the additional outlay David has for financing a more expensive car nor have I added servicing costs which are typically greater for diesel cars. Let’s ignore these factors for the purposes of simplicity.
Okay, so after 3 years David has only enjoyed 6 months of more cost effective driving. Now, they trade those cars in for exact equivalent models which are three years younger. John’s car is now worth circa €7000 and David’s is approximately €10,000. It is generally considered that the gap between petrol and diesel tightens ever so slightly as cars get older but I have kept the gap at €3,000 again for illustration purposes. So once more John buys a €15,000 vehicle meaning his cost of change is €8,000 and David buys his €18,000 car meaning his cost of change is €8,000. So, who is the winner?
There is likely to be an outcry of counter arguments, ifs, buts and what-abouts but regardless of your own personal feelings, the fact of the matter remains – when it comes to a 3+ year old car it is not as simple a case of assuming that diesel provides the best value for money. Increase annual mileage to that stated in my example and yes, diesel begins to edge out petrol, but reduce it and the tables are turned. We are seeing more and more diesel models returning to the market with what the industry considers “petrol mileage”, so let me leave you with this observation. If more petrol buyers switch to diesel, and then these vehicles return to the market as used cars with low mileage, what does that do to the value of an average mileage diesel car? These vehicles now appear to have substantially more mileage when in fact they have perfectly acceptable odometer readings.
I agree that diesel is popular and rightly so. The motivation behind the revised Co2 system was commendable, but the method, the way in which it was implemented, has shook the industry to its core. It has forced shut the doors of many long standing dealers and divided the buying public unequally into pro-diesel and pro-petrol segments. If careful consideration is not given to purchasing a used car, neither the customer nor the dealer wins.
At this point it is important to note that I am neither anti-diesel nor oblivious to the reality that the cost of change is probably the most significant factor when trading in a used car. Often customers confuse a presumably higher priced vehicle to be a worse deal than a cheaper equivalent. This is not always the case. Many find the higher asking price is met with a higher trade in allowance to offset this and in two very different circumstances the cost of change can be quite similar. However, it is my observation that the changes to the road tax system have done little to help either the customer or the dealer and instead what we have is a confusing, unequitable and unfair structure which thankfully looks to be under review in the upcoming budget but which has caused untolled damage in the short time that it has been implemented.