The Value – Issue #4: Ten Things That Really Matter in Canada’s Used Vehicle Market

Welcome to The Canadian Black Book – The Value. Our goal is to provide our clients and partners with news, event updates, new initiatives and opinions from Canada’s trusted source for vehicle values and automotive insights. In this edition we cover:

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Brian Murphy
Brian Murphy, VP Research & Editorial, Canadian Black Book

By Brian Murphy

When analyzing today’s auto industry, we can argue about any number of given factors that touch any given number of areas inside Canada’s auto sector.  That said, from our estimation at Canadian Black Book, we can narrow that long list of potential topics down to ten subjects that really matter and form the crux of how our used vehicle market functions in Canada.

The following ten areas all pose direct impact on vehicle prices today (wholesale values), vehicle prices in the future (residual values) and the potential proceeds from vehicle remarketing efforts.  How this relates to an appraisal of our future is a complex equation of how these ten ‘things’ interact with each other.

First – The Canadian Dollar: The Canadian Dollar has a profound and swift effect on the value of used cars in our domestic marketplace.  As our Dollar weakens there is a direct correlation to an increase in exported used supply to the States.  As you can imagine, on the contrary, as our currency gains value against the greenback, we begin to see a net reduction in in the volume of used vehicles exported from Canada.   Eventually if the dollar strengthens enough, and supply permits, used vehicles will again en masse be imported from the U.S. to Canada.

Enter ‘arbitrage economics’, which is the act of buying something at a low price in one market and then selling it a higher price in another market.  Currently, the Canadian Dollar is around $0.77, the lowest it’s been since June 2017.  For example, a particular large SUV sells for $42,500 in Canada at wholesale, while the same unit goes for $54,500 in the U.S.  While our dollar is low, there is a lot of money to be made.  The exchange rate is the key that determines if the ‘export dam’ is open or closed.

Second – Supply:  The supply of used vehicles in the U.S. and Canada, plays a huge roll in dictating both current and future values.   The simple concept of supply and demand really does drive remarketing cycles.   In short, demand has been great, while supply of late has been tight, bringing prices up.  However, we are on the verge of getting a lot of supply!

Between 2013 and 2017, we’ve seen an average of 225k units return to market off lease per year.  That number is projected to breach the 400k mark, between 2019 to 2021.  We don’t expect used vehicle demand can keep pace with such a supply, causing prices to lower.

Third – Lease Penetration:  Leasing has become Canada’s used car factory.   As an industry we keep ‘making’ more used vehicles.  Last year, about 450k vehicles were leased, with around 400k of those to consumers.  Therefore, in three to four years, we will have ‘made’ that number of used vehicles which are purchased by the lessor, by the retailer or sent to auction then purchased by a retailer.

All the while, we sit in an environment of record new car sales, which inevitably will lead to record used car supply.  But at what price?  Lower prices? Yes!

Fourth – The Economy:  Auto sales are a leading indicator for the economy, as we can see a direct relationship between softening sales and an economic slowdown.  Simply put, if consumers are not secure in their financial future, they will postpone the purchase of big ticket items.

Currently we are experiencing the lowest unemployment rate this century, coupled with high consumer confidence and amazing GDP growth.  If we simplified the economy to green light, yellow light, red light, then we are very much…green light.

Fifth – Retained Value Trends: What goes up often comes down!  Our business is a cyclical one and it’s helpful to understand where that cycle sits.  From 2005 through 2009 Canada experienced a steep decline in retained values, due to poor economic factors, too much leasing, and a strong dollar ($1.26 in March 2009).  However, since mid-2010 we have seen a steady rise in used values.  When values fall, leasing is less attractive and used vehicles become more appealing, and obviously when values rise, leasing again becomes very alluring.

On average, across all segments over the last seven years, values have increased a remarkable 3.7 per cent.  We expect this market is turning, primarily driven by the coming boost in supply.

Sixth – Consumer Tastes: A major contributor to both supply and demand, are consumer tastes.  It is this force that dictates OEMs investments in new product lines, face-lifting existing ones and mega marketing campaigns.

Today, Canadian consumer tastes have moved away from cars with only a 32 per cent share of sales and falling, while trucks and SUV sales grow.  Some car models will soon be extinct.  EV sales are growing, yet still make up a tiny portion of the overall marketplace and offer weak residual values.  These tastes have a significant impact on how vehicles depreciate, the more desirable the vehicle the more desirable the value retention!

Seventh – Rental Cars: Ten per cent of the market (200k) vehicles are rentals, making another large source of used product.  However, around 20 models make up over 33 per cent of rental car fleets.  These models typically do not win Canadian Black Book Best Retained Value Awards and are therefore difficult to lease to consumers.  OEMs target the rental buyers with these, depressing their resale value; and the cycle repeats.

Eighth- New Vehicle Incentives: Although positive for the new car buyer, incentives are not always a good thing.  Incentives that are persistent over a many months, especially large cash incentives have a cooling effect on resale values.  Let’s say a brand new $60k vehicle is 25 per cent off, then right off the bat that vehicle’s resale value is $15k less than normal.   Another effect is that these programs can keep consumers in a negative equity positon longer, which can place demand at a lower price point.

Ninth – Is the Product Any Good?: At Canadian Black Book, we evaluate 90 plus vehicles annually.  So, we get out and drive them and experience them in the same way a new car buyer would.  Our goal is to determine if the vehicle is competitive in the marketplace today; who the real competitors are and is it better or worse; and how is it priced?  One thing we do know is that if the vehicle is not competitive now, it surely will not be in three to four years when it comes back to market as a used vehicle.  Typically in our opinion, eight out of ten rides we test are quite good.  The obvious bottom line is that weaker vehicles will result in more residual value risk for the lessor.

Tenth – New Technology: The market tends to be skeptical when it comes to value for technology.  What will a given technology be worth in five years?  Often the answer is zero, as it may be obsolete, become standard equipment, or the value has come way down for that particular technology (think DVD players).   Technology on a new vehicle is profitable for the OEMs, yet remarketers will struggle to get much value back for many newer high-tech features.

Understanding or explaining the dynamics and trends of used vehicle values is far from simple.  It could be broken out into a plethora of economic, political, social and cultural factors.  But, when it really comes down to it, these ten ‘things’, all have direct impact and can provide the foundation of information that really matter, when it comes to used vehicle values in Canada.

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