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Why leasing collapsed across North America

If you lease, you are essentially renting a car. The rental payment is based on how much value that new ride will lose in the future.

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Just a few years ago, nearly 50 per cent of Canadians leased their vehicle, but that has dropped to less than 10 per cent in the wake of the financial crisis in 2008, auto analyst Dennis DesRosiers notes.

"The issue wasn't the demand for leasing, it was the availability of leasing products," DesRosiers says in a note to client. "In order to offer a lease, the [original equipment manufacturers]have to be able to securitize their lease portfolios by bundling vehicles together and selling them as a derivative. With the collapse of the U.S. subprime mortgage market, the securitization of any asset-backed product virtually disappeared and thus leasing collapsed across North America."

DesRosiers notes, however, that the marketplace for securitized lease portfolios is returning to some measure of health, which means leasing is poised to make a comeback.

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"Leasing accounted for close to 20 per cent of sales in 2011 and should account for mid- to high-20 per cent in 2012," he notes. "With very high used-vehicle prices, a lot of consumers could embrace a new vehicle especially if they are able to lease."

DesRosiers adds that a shortage of used vehicles is forecast to last a number of years, the result of which is "very little residual value risk in the lease market."

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