Concern over buyer resistance

Britain’s car market has undergone a total uplift of baseline residual values in the wake of rocketing used car prices prompting possible concerns of buyer resistance.

There are at least two issues that could impact on residual values and therefore used car prices - although a Tsunami impact that would trigger a return to recession values is not expected.

There is some concern from leasing company bosses and residual value experts as to whether motor manufacturers will destabilise the market by forcing new car registrations (see panel 2) and there is also a worry as to used car buyer behaviour with prices of ex-company cars at record levels.

The residual value trend means that vehicle leasing and contract hire companies are reaping major windfalls on a wide range of four-year-old/80,000 mile ex-company cars (see chart below) - and younger models in terms of both age and mileage.

However, conversely that means that the public are paying hundreds and even thousands of pounds more for second hand cars than previously.

Andrew Jackson, head of analytics at Glass’s, said: “We are currently predicting a relatively stable outlook so prices will broadly remain at current levels. If prices stay high people could change their purchasing behaviour and we need to understand if there will be any buyer resistance. It is something we are investigating”

Dennis Keenan, managing director of KeeResources, said: “The market is on the controlled edge of boiling over. Consumers are being asked to pay 50% more than three years ago for the same car in some cases and that is not sustainable. We have perhaps had a major upward re-set of baseline residual values in the UK”

Andrew Mann, managing director of JCT600 Contracts, is also concerned at the impact the rising cost of motoring - not simply buying a car but also keeping it on the road with rising insurance and fuel costs - will have on residual values.

Taking a cautious outlook on future residual values, Mann said: “Annual private mileages have decreased over the last couple of years and since cars are better built now there is less pressure to change or replace.”

He added: “Our overall economy with pressure on disposable income isn’t conducive to raising prices on non-essential or luxury items in the short term.”

Dylan Setterfield, senior editor, forecasting - CAP, said: “Dealer margins are under pressure because used car prices are close to or have hit their ceiling. The only way for dealers to maintain margins is to pay less for stock.

“It is a tough economic situation and consumers only have a certain amount of money to spend on a car and they will seek out the best buy for that money. There is an element of buyer resistance in what is a subdued economy.”

Figures compiled by Fleet News from a sample of new models launched in the UK around four years ago reveal the buoyancy of used car values being obtained by leasing companies.

Using data from vehicle pricing experts CAP, the figures highlight that ‘clean’ prices are in some cases thousands of pounds higher than the residual value forecasted by the organisation four years previously.

For example, the CAP ‘clean’ valuation (February 2013) of a Volvo XC60 2.4D SE Lux was £4,200 higher (50.9%) at four years/80,000 miles than the residual forecast four years previously.

Similarly, the CAP ‘clean’ value of a Ford Kuga 2.0 TDCi Zetec was £3,650 (66.4%) higher than the forecasted residual value in February 2009.

Ian Nicholson, finance director, Venson Automotive Solutions, said: “Leasing companies are riding a little bit of a wave at the moment because values have hardened due to supply shortages. However, we believe the residual values set by CAP post the crash were conservative.”

Setterfield said: “No one forecast what would happen to the market. Used car prices increased more than 20% February 2009-2010 and have kept rising. If that rise had have been forecast then those making it would have been laughed at. It was not a reasonable possibility.”

However, one of the aims of the recently-appointed Setterfield is to enhance CAP’s product suite and its intelligence gathering. He said: “We want to be more open and transparent and show how we arrive at the forecasts made.”