The automotive industry in the UK has had another positive year, with the new car market growing for 33 months in a row, up 9.4% year-to-date in November.
The feel-good factor is important in maintaining consumer confidence to buy big-ticket items such as cars, and an improving jobs market, a stable economy, low interest rates and low inflation has added to the strength of the market.
The recession in the UK in 2008 created a shortage of stock due to lower new car sales during that time, which had a knock-on affect in the used car market, keeping values high. However, the market is fearing a slight dip towards the end of this year and it signals a levelling out of demand after months of unprecedented growth.
“Looking at the current market, used car volumes rose more slowly than expected in the wake of the plate change [in September] and this allowed the market to absorb the increase without impacting unduly on price performance in recent weeks,” says BCA’s UK operations director Simon Henstock.
“However, with dealers anecdotally saying that retail activity has slowed somewhat in recent weeks, we are starting to see some pressure on conversions in the wholesale market and rising stock levels as a result.”
Used car trade values fell by 2.9% in November after a sharp dip in demand, according to price guide firm Cap. Average values fell by £300 per car, with a sharper downward dip during week three of the month than at any other time this year. As a result, the December edition of Cap’s monthly Black Book shows the biggest single fall since June 2011.
Derren Martin, senior editor of Black Book Live, says: “Depreciation year-to-date has been less pronounced than it was to this point last year, and so prices are generally higher than they were 12 months ago.
“Rather than the market meltdown that some people fear, we believe it is more a case of unusually high prices ultimately proving to be unsustainable.”
Henstock believes new car volumes will continue to rise in 2015 with a greater choice for buyers in the marketplace. With more stock available, those fleets disposing of cars should expect a tough time achieving good values next year for vehicles in poor colours (such as brown), with high mileage, or in need of more repairs. Stock needs to be ready to retail.
Phil Price, International Decision Systems’ residual values editor, says that while the growth in the new car market will naturally see a rise in the amount of vehicles coming into the used arena, the negative impact on prices will only be felt on those that are not ready to retail.
“In 2010 there was a spike in the sales figures due to the scrappage scheme, and although there are quite a few more cars around now, not all are of a good standard,” he says.
“Experts expect the rise [in new car sales] to even out over the last quarter, but what of next year? There aren’t an infinite amount of customers out there, but if manufacturers and leasing companies keep introducing more and more appealing and cheaper ways of owning a car [growth could continue].”
Price believes fleets will be protected next year to an extent with cars of a good standard able to hold their values, but it’s possible the market overall will see a drop in values in 2015 with an influx of stock.
To a certain extent, it’s difficult to predict what will happen to the used car market next year, but there are some indicators that can impact values and demand.
For instance, the SMMT is expecting the growth in the new car market to slow down and stabilise next year, which would eventually be reflected in a steady used car sector.
In the more immediate future, though, Henstock, believes there are strong indications for further growth for used car sales. A possible interest rate rise next year will mean homeowners will have less money, which could see them looking to the used car market, rather than new, and that will keep demand strong.
Those that have saved money would also start to see a better return on their investment as a result of an interest rate rise, which could fuel new and used car sales overall.
Henstock says: “Next year is an election year. General elections are a fact of life and it is impossible to gauge the effect – if any – this might have on the marketplace at this distance. History tells us there can be some initial uncertainty. whoever prevails, but this soon settles down and it is business as usual. What might be more worrying is if there is no clear-cut decision from the electorate and we end up with a hung parliament.”
The Vehicle Remarketing Association also thinks a general election will bring uncertainty in May. The association believes a slowdown in European economies could put more pressure on manufacturers to divert production to the UK, which would have a negative effect on used values.
Andy Brown, managing director of CD Auction Group, says 2014 has been stable for the used car market and there was no reason to expect huge disruption in the first half of next year.
He says: “Supply of ex-fleet stock is likely to remain limited next year: new car fleet sales were down by 0.5% in the first six months of 2012 [three-year old stock coming through in early 2015] and economic growth forecasts are slipping. This is likely to reduce business confidence and de-fleet activity.
“Retail demand is likely to remain steady but subdued, especially as there are other sources of cars emerging (such as ex-retail finance PCP). Trade buyers will continue to be selective but will pay good money for the right car in the right condition.”
However, a stable market in 2015 does not mean fixed values. Brown followed others in the industry by saying vendors will have to be realistic about seasonal trends, condition and short-term demand, which is often not truly reflected in guide prices.
Light commercial vehicles
The key factor driving the used van market into 2015 is the supply of good retail quality stock, or rather the lack of it.
Duncan Ward, BCA’s general manager for commercial vehicles, says: “A lack of good van stock means there is plenty of competition for the best examples reaching the market. Buyers particularly like any vehicle with a good, useable specification or specialist equipment, and there is always demand for Lutons, dropsides and tippers.”
Ward sees demand from the construction industry ramping up next year due to the needs of numerous infrastructure projects, road network improvement schemes and house-building projects. Builders and their associated trades are some of the biggest buyers of LCVs, and BCA is expecting demand to be strong “for some time ahead”.
Additionally, the digital shopping revolution continues to generate the need for parcel, courier and delivery vans of all types and capacities, which is delivering broad-based demand into the used sector and keeping values firm.
Ward says: “The used LCV market will continue to experience a shortfall of stock for some time ahead, a result of the collapse of the new market in the immediate post-recession period.”
While BCA believes van demand will increase next year, Cap believes van values will stall in 2015 due to reaching an unsustainable level.
Values of three-year-old vans have risen by around 50% since 2010, according to Cap’s Red Book, which gives the example of a short-wheelbase, 60,000-mile Transit having increased in value from £4800 to £7100 over this period.
“Nobody in the industry, including ourselves, anticipated the rate at which demand has increased,” says Cap’s commercial vehicle forecast values expert Tim Cattlin.
“Economic recovery has therefore unleashed serious pent-up demand into the auction halls and onto the trader’s pitch.”
Cattlin believes that thanks to 2011’s substantial market recovery of new sales, the used market will alter as replacement cycles result in these vehicles filtering into it as the year progresses.
“We believe the market for used LCVs will remain buoyant for the next few months, but values will begin to ease,” said Cattlin.
The residual value expert’s view
Next year is set to be the most significant year in the used car market since the recession, valuation specialists Glass’s is predicting.
After a reasonably strong start, a variety of factors both within and outside the industry are likely to have a definite effect on both supply and pricing in the second half of the year.
Rupert Pontin, head of valuations, says: “The key moment is likely to be the general election. Like any major national event, this will have a dampening effect on used car sales, especially as the result looks uncertain at this distance.
“Immediately afterwards, whichever stripe of major party gains power, there is likely to be a new round of austerity measures and also tax increases, damaging both spending power and consumer confidence.
“Shortly afterwards, by the end of summer, most economists feel that we will see an interest rate rise. Even if this is just 0.25%, it will again inevitably hit consumer plans for replacing their car.”
Pontin says that these events affecting demand were likely to be accompanied by an increase in supply.
“Over the past few months, we have seen supply increase by between 1-1.5% every month, which is a big change,” he says.
“This is set to continue during the rest of the year, having an overall downward effect on prices.”
Pontin says that 2015 would be significant because it would mark a definite shift from the used car market patterns that had been seen since the recession ended.
“For a long time, we have been in a low-supply situation against a gradually improving macroeconomic backdrop, but that cycle has started to come to an end in recent months and that change will characterise 2015.
“Our longer-term forecast is that all of these factors will continue to take even greater effect in 2016, with even more pressure on prices through reduced demand and increased supply.”
But Pontin says there was unlikely to be a similar scenario in the new car market: “Here, we expect sales to stay strong, simply because manufacturers need to ensure that factories continue working as close to capacity as possible, and will offer finance to make sure this happens.
“Later in the year, we believe that it is likely that the deposit levels required for these finance deals will start to fall in response to macroeconomic effects.”
