Remarketing: Cracking first half
10 August 2018
Author: Jack Carfrae
The used car market is in rude health and, save for a tough May, the first six months of 2018 produced consistently strong values. Jack Carfrae examines the year so far and predicts what's yet to come.
The used car market has been in very good shape for a very long time. Year-on-year values have been consistently on the up, and the majority of auctioneers and residual value specialists agree that sellers have been making hay for a good 12 months.
Consequently, the first half of 2018 was, on the whole, a cracker and, even in the face of higher volumes - historically a value killer - the first quarter saw particularly strong prices and demand.
"While we had some differences this year - we had quite a bit more volume - the first quarter was very strong," says Martin Potter, group operations director at auction firm Aston Barclay.
He reports that average quarter one used car values were around £270 greater than the equivalent period in 2017 and claims ex-fleet diesel prices were at a healthy level of circa £9,800, largely unhindered by negative publicity.
"I would say it's probably taken us a little bit by surprise in terms of how strong it's been," adds Derren Martin, head of current valuations at Cap HPI. "That's not just from the start of the year; every month from last August the monthly movement in values has been a more positive one than the same month the previous year.
"If you bought a used car a year ago, for example, ran it for 12 months and added something like 10,000 miles, you wouldn't have lost any money on it because values have been so strong."
The new car market is among the reasons for currently burgeoning second-hand values. Registrations have curtailed - they were down 5.7% in 2017 - and, although they are still well above the doldrums of the financial crisis, main dealers have turned their attention to used cars to fill the gap.
"The manufacturers have cut back and switched a lot of their production to Europe," says Martin. "Dealers' bread and butter is now used car stock, so they are perhaps competing a little bit with some of the car supermarkets.
"They're making conscious decisions to go out and buy used cars - not just selling part-exchanges and cars they buy from the manufacturers, but buying used cars from the auctions to satisfy demand. They're also hanging onto part-exchanges from other marques as well, so if they were previously sticking those to the block because they weren't their own brand, they now keep hold of them, retail them and make some money doing that. It's definitely an opportunity for them as new car supply drops."
According to Potter, the new private car tax regime, which came into force in April 2017, caused a subsequent increase in stock at around the turn of quarter two this year. Clearly, it did not encroach on values, but it did make itself apparent for the following reasons: "Fleet and leasing companies pulled forward their three-year-old terminations that were due April/May/June 2017 into the March plate to take advantage.
"We saw a lot of that volume come early, and the dealerships did the same, so we saw a lot more part-exchanges in the market in March. This year, it's stuck with the traditional changeover, when everything gets forced into the March plate-change, and it actually takes until April until those returns start filtering through to us. That's why, this year, April and May have seen more volume than we saw last year - just because of that VED spread. It's the reaction of those different providers to that legislation change."
If this year's used car market has struggled at all, it was in May, when values lost a little of their verve. This is not entirely unusual, as post-Easter lulls are the stuff of typical seasonality, and points to a market that has returned to a historical norm after it was dashed out of recognition by the previous recession.
"The biggest impact that happened in the first five months of the year, in terms of auction performance, is that it was one of the best Easters ever," says Karl Ward, remarketing manager at Ogilvie Fleet. "The first two weeks in April, it held up really, really well, then, in May, the market wasn't so strong. There was a lot of volume in the auction world, and the market stood up to that for a while. Then supply outweighed demand a bit, so the last two weeks of May were really tough - half-term was the last week in May and the bank holidays were kicking in."
The figures bear out the anecdotes. According to the National Association of Motor Auctions, first time conversion rates decreased by 5.5% from April to 75%, the average selling value dropped 0.4% from £5,677 to £5,657 from the previous month (though it was still up 9.3% from May 2017's £5,176) and the first-time premium was down 33.3% and £22 compared with £33 in April.
BCA's monthly Pulse report showed a very similar trend. The auction giant reported a modest £16 reduction in average selling values between April and May to £9,568, which was still up £707 and 7.9% on the previous year. Average fleet and lease values took more of a hit, falling by £174 and 1.5% to £10,963 - but that was from April's record high of £11,137 and May represented the company's third-best month for fleet and lease sales.
Speaking in June, COO for UK remarketing Stuart Pearson acknowledged the drop but downplayed its overall impact, saying, "The seasonal dip that is often felt in May hasn't been so significant."
"Manufacturers have cut back and switched a lot of their production to Europe."
Figures for June were scarce before BusinessCar went to press but experts suggested the market had strengthened after May's wobble. They have their doubts about whether the latter half of the year will be as healthy as the first, though.
"Traditionally, August is difficult," says Ogilvie's Ward, "you have obviously the new reg coming out in September, so I can't see that being any different to previous years.The end of July and August could potentially be difficult for pricing."
Martin believes that, in comparison with previous years, prices are likely to remain above average, but the dizzy highs of a few months ago can't go on forever.
"It will still be strong, but it can't carry on being this strong. I would probably say it'll do what it's done in previous years, where the second half of the year tends to be tougher and values do slip away, so we're kind of predicting that will happen - not to the degree it has in the past - but if values are high, they've potentially got further to fall. I think they will fall at a similar rate to last year, so you'll end up with lower depreciation over the whole year than for many a year."
As well as conventional seasonality, Martin believes the confusion around WLTP - which will apply to all new cars from September - could bite.
"For people disposing of vehicles, it's the usual stuff: not too much in any one go, be wary of WLTP and the potential for either pre-reg activity happening around that or dumping vehicles. There is actually the potential for manufacturers to hold back on registering vehicles completely, which could under-populate the used car market, with people buying used instead of new because of a bit of confusion.
"It's nothing groundbreaking but I would always be wary of defleeting too much in quarter four, because that's when the market tends to slip away, especially in December; people aren't thinking about changing cars at that point.
"There's always the thought that you could hang onto your convertibles and things like that, and wait for a bit of strength in the New Year. But your best time is to defleet probably before quarter four - maybe quarter three would be a good time to move cars on, rather than waiting until the end of the year."