The Value – Issue #13: It’s a New Year: How Does Canadian Black Book See 2019?

HAPPY NEW YEAR! Welcome to Canadian Black Book’s – 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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By: Brian Murphy, VP of Research and Editorial for Canadian Black Book

Happy New Year!  In order to provide our glimpse into 2019, we need to take look at the recent past.

For instance, new vehicle sales set an all-time high in Canada in 2017.  That year saw over two million new units sold for the first time in this country.  Enter 2018, and the auto business stayed extremely hot.  In fact, the past year (once the numbers are all in) will most likely prove to be the second best year on record, for new vehicle sales in Canada, by just a fraction compared to 2017.  This is truly impressive when you consider it was not that many years ago that our industry was posting 1.6M unit results per year.

Here’s the catch.  Record amounts of new cars sold, results in record amounts of used car supply in the future, which we know will put downward pressure on used vehicle values.  But that can take some time.

After the fairly recent news of the USMCA free trade deal, and recognizing an increase in used sales earlier last year, Canadian Black Book was confident and correct that 2018 would break the used car sales record, which was also just set in 2017.  It really has been a wild ride at new and used dealerships over the past two years.

In 2018 the Canadian Black Book Used Vehicle Value Retention Index, which tracks used values of 2-6 year old vehicles, showed serious strength.  In fact, the months of April, May, September and October all broke all-time records for industry average used vehicle retained value.  These retained values we calculate today are a key factor into how Canadian Black Book forecasts its residual values for the future, for the Canadian auto sector.

Newton said, “what goes up, must come down”.  Canadian Black Book believes, after all this industry wide success, we have now peaked in terms of prices.  In 2019 and the following few years, we predict average values to begin dropping at the same rate (3 to 4 per cent) as they have been ascending over the past seven years or so.  This decline will be felt differently among the various vehicle segments, as demands shift away from certain vehicle types onto others.

Given the recent upward trend in exchange rates, which will likely continue and the pending finalization of USMCA, the Canadian dollar is expected to strengthen into 2019.  If the Loonie gains steam to a level much over $0.80, we enter a territory where it is much less desirable for US buyers to look north.  High levels of used car exports to the US, as a result of cheap CDN dollars, has been one of the major drivers of the success in the used market domestically.  With less US demand, will come more supply and lower used values.

At least in 2019 we will not have to struggle through the uncertainty of NAFTA negotiations, from a particularly unpredictable White House administration.  We now know that 25 per cent tariffs on cars will not happen.  Having a deal in place with the U.S. and Mexico provides much needed certainly for OEM’s planning new models and ensures that used product can cross the border, to the benefit of both buyers and sellers.  However, the Canadian auto sector will have to endure 25 per cent tariffs on steel and 10 per cent border taxes on aluminium, into 2019, unless our government is able to turn the page on those.  The result will be higher new car and car part prices over the long term.

Compounding the supply issue, mentioned earlier due to record sales, is the result of the industries past few years’ massive growth in leasing.   In Canada, the off-lease inventory nation-wide is expected to double alongside two million additional off-lease units south of the border.  US market supply is expected to peak in 2019.  This glut of supply, will begin whittling away at used pricing as well as forecasted residuals early in 2019 and onward.

Trucks and SUVs continue to draw demand here in Canada.  As demand dwindles away from sedans, we can expect residuals for them to slide further while trucks and SUVs stay strong.  And, currently fuel costs have eroded, and if continued, will surely add to this trend to favour the larger gas thirsty rides.

To summarize, Canadian Black Book expects 2019 to experience a cooling off period.  Increased supply, from a number of fronts, will pressure used values and residuals downwards.  The increase in supply down south bringing lower used values in the US, coupled with a potentially higher CDN, will slow down exports.  2019 may be the end of this wild ride, perhaps time to at least begin thinking about tightening up.

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