Remarketing: The used car market
21 December 2017
Author: Jack Carfrae
The used-car market has held up well throughout 2017, weathering threats of increased supply and a steep drop in diesel values. Jack Carfrae rounds up the year and asks what 2018 has in store.
Since the financial crisis, it's been difficult to tell exactly what a 'normal' used-car market should look like. Once-predictable second-hand vehicle prices followed the stock market on its journey to rock bottom around 2008, simultaneously throwing out established rules about what sold, for how much and when.
Subsequent years left observers scratching their heads but, if anything, the past two or three years seem to have revived old habits, and brought the market back to something like its pre-crash self. The general consensus is that it has been solid enough throughout 2017, particularly in the first half, while the dreaded spike in stock, generated by the past few years of record new-car sales, hasn't really materialised, which has helped to keep any dramatic price drops at bay.
According to auction firm BCA, sales figures have been in rude health since January. "BCA's average used-car values have generally been rising throughout 2017, and in November were around 9% ahead year on year, equivalent to an £800 rise on the average car value of £9,364 recorded during October," says BCA's UK managing director for remarketing, Stuart Pearson.
Jon Mitchell, UK group sales director at online remarketing specialist Autorola, agrees. "I think the quality of stock has been fairly strong this year," he says. "We're certainly seeing more demand for high-end stock at the moment and, in terms of our overall online price, across quarters one, two and three, we're up quarter on quarter. Which is fairly unusual, because you would normally expect the first quarter to be strong, because the market's more buoyant and then it usually tends to dip the other way. That indicates that prices are still strong."
Not everyone agrees that used-car values have been impenetrable in 2017, though. While conceding that this year's market has been "relatively stable", Neal Coleman, the head of asset risk at leasing giant Alphabet, claims that prices have been eroded by a greater level of stock. He cites a "slight deterioration, driven by increasing volumes of used vehicles as the new-car registration increases over the past few years make their way into the used-car market".
If there's any evidence of a return to pre-financial-crisis normality, it's in the market's seasonal fluctuations. Seasonality was one of the many things thrown out of whack in 2008-09, but these days, it's more or less re-established.
"In reality, December's always quiet, because everyone's spending their money on presents, and it'll pick up again in January."
"I'm a strong believer in seasonality; it does affect things and it's coming back," says Gavin Amos, global valuation director at Global Analytic Services. "It's going to tail off towards the end of year, and some people will start saying 'It's all doom and gloom', but in reality, December's always quiet, because everyone's spending their money on presents, and it'll pick up again in January; it always does in a retail environment."
"Despite volumes remaining high, buyer demand has been steady throughout the year with the usual seasonal fluctuations around Easter, the bank holidays, the summer break and school holidays," adds Pearson, reaffirming the presence of typical seasonal factors.
Diesel is this year's elephant in the room. Justified or not, it has endured a prolonged spell of bad press, but the vast majority of those in the used-vehicle business believe second-hand oil-burners have been unaffected by the hype. Equally, the latest SMMT used-car sales figures showed that diesel purchases were up 4.2% at the end of the third quarter.
"While there has been a lot of comment about diesel price performance from a variety of sources, this hasn't had any real impact in the wholesale arena," says Pearson. "Our average diesel prices have risen by over 6.0% this year, underlining that trade buyers continue to see a profit opportunity in diesel product.
"A second or third user buying a diesel as a family car will not be impacted by company car tax or subject to any additional new-car purchase tax. Their main concerns will be around the cost of fuel and how many miles they get from a full tank, and for many, diesel will remain the preferred fuel type."
That said, it has been acknowledged that diesel city cars and superminis are now a harder sell second-hand. Coleman explains, "We have seen a narrowing of the diesel premium against petrol, particularly in the smaller-car sector, driven by the uncertainty and 'noise' around diesels, as well as improvement in the performance of smaller petrol engines."
"The short and rough version is: petrol prices are up; diesel's holding," adds Mitchell. "We know from the OEMs that order banks for large diesels aren't plummeting, but the fact is, small petrols are in demand. We have to remember that Joe Public is driving around in cars that the fleet businesses have finished with. The company car driver always dictates the used-car market, but they don't so much in the small car market. In the past few years, Joe Public has said, 'The government says I should drive diesel and it's free to tax, so I'll buy a Corsa diesel,' whereas they are now saying, 'Diesel's dead. I need to replace it with a Corsa petrol.' That's the reality of what's happening, so the small diesels are suffering a bit, but they'll go away quite quickly, because these cars are five or six grand.
"As for big stuff, some of the mid-range product that's heavy diesel might be a little bit more tricky now, but overall, diesel is holding very well. And if you get any bigger than that - like a 5 series, E-Class, A6/A7, all the Range Rovers and Jags - it still has to be diesel."
As we enter 2018, the now-declining new-car market is expected to cause the trade to increase its focus on second-hand sales.
"A number of commentators are suggesting that used cars will be a prime source of dealer profit opportunity next year, so we expect to see a competitive and active marketplace across the board," says Pearson.
"I think now that the new-car orders bank has peaked and sales are starting to fall away, dealers are actually looking to their used-car operations even more, to generate good profit out of them," adds Mitchell. "Certainly from feedback we had from buyers in September, the month of the new plate change, they are focusing more on used cars at the moment now that new cars are in decline. That helps with demand, because when the new-car bank is absolutely flying, the dealers are just chasing the incentive they get from the OEMs for registrations."
On the whole, though, the remarketing industry is anticipating more of the same in 2018. Predictions include a strong start to the year, decent prices for ex-fleet vehicles in good condition and a cautious approach from manufacturers around supply. Pearson continues, "Typically, the markets start very strongly, and January will see plenty of activity, if previous years are anything to go by."
"I think we'll see very similar trends again," adds Amos. "Although it depends if the diesel thing bites, then we might see anti-diesel reactions pushing the values down, but I think it's going to carry on going as it is."
The real issues to watch out for next year, which could impact sales and residual values, will be the external factors beyond the control of fleet operators and used-car sellers.
"Brexit, then there's also the interest rate rise. These factors all contribute to everyone's mindset and it just makes them that little bit more cautious," says Amos.
"We expect a continuing trend of pressure on used-car values as the increased volumes of new vehicles registered since 2015 continue to make their way into this market," adds Coleman.
"However, we expect that this will be offset by manufacturers restricting supply with the weaker sterling exchange rate and higher UK inflation, while economic and political uncertainty is likely to play an increasingly important role in 2018."