New cars are 'elephant in room'

New car sales volumes are the ‘real elephant in the room’ in terms of predicting future residual values, according to Denis Keenan, managing director of automotive data provider KeeResources.

The Society of Motor Manufacturers and Traders is predicting a slight increase (+0.6%) in new car sales this year to 2.057 million units (2012: 2.045m) with a further rise (+2.6%) in 2014 to 2.111m units.

Based on those numbers Mr Keenan is forecasting a slight reduction of 3-5% in residual values up to the end of 2016 largely due to a predicted acceleration in UK new car sales, although there will be no wholesale realignment of the market back to pre-recession levels.

Keenan said: “These numbers would therefore suggest a relatively stable used car market, but even an extra 5% lift to above 2.2m new car sales could harm three and four-year residual values by up to 6-8% or even 10%.

“However, that value reduction will not feed through until 2016 or 2017 when defleeted cars start to reach the used car market. Even then the effect of longer replacement cycles means the impact will be dissipated across both three and four year old models.”

In terms of residual value forecasting, Keenan shares the concerns of leasing company bosses of the possibility that a buoyant UK new car market - relative to other European markers - could become a ‘dumping ground’ for metal unwanted elsewhere.

However, he said: “We believe the more stable manufacturers, understanding the longer term damage of such actions, will be reluctant to do much to destabilise the overall new car volume.

“Some, however, may seize the opportunity in the run up to plant closures within the European Union to squeeze some final volumes out of these assets before closure, and this uncertainty remains our biggest concern.”

Data from the European Automobile Manufacturers’ Association reveals that new car registrations fell 8.2% in 2012 - the biggest contraction of the European Union market since the 16.9% downturn in 1993. While, UK sales increased 5.3% last year, other major markets all reported registrations declines last year: Italy (-19.9%), France (-13.9%), Spain (-13.4%) and Germany (-2.9%).

Registrations across the European Union have continued to decline in 2013 with January volumes down 8.7% at 885,159 units - the lowest sales recorded for the month since records began in 1990 - with only the UK market (+11.5%) recording a rise in demand. Elsewhere sales in major markets fell: Italy (-17.6%), France (-15.1%), Spain (-9.6%) and Germany (-8.6%).

Keenan’s fear is shared by Ben Newton, head of pricing research at Lex Autolease, who said: “The Eurozone’s continued economic difficulties have significantly impacted volume car manufacturers, particularly those operating in France, Spain and Italy that are heavily reliant on demand from within this territory. 

“Manufacturers in these countries have experienced a significant decline in the registrations of new vehicles and have had to reduce production to inefficient levels in response to failing demand. 

“Although manufacturers could reduce production by closing factories, this is fraught with political and reputational issues. As a result they may look to increase the supply of vehicles to alternative markets such as the UK, which based on 2012 data is the second largest market in the European Union, and the only major European economy that had growth in new vehicle registrations.” 

However, Dylan Setterfield, senior editor, forecasting - CAP, says he is less concerned about the possibility of manufacturers diverting cars to the UK than he was in the latter part of 2012.

“Exchange rates are reducing so there is not the incentive for manufacturers to chase volume,” he said. “The UK was a very attractive place to sell new cars towards the end of 2012 and we were seeing manufacturers forcing registrations. However, Sterling has weakened against the Euro so I don’t think we will get the same kind of volume of new cars dumped in the UK that I had previously expected.”

Vehicle information and forecasting experts Glass’s is currently predicting residual value stability, but Andrew Jackson, the company’s head of analytics, acknowledges the whole European new car sales scene must be monitored.

“There are markers which could lead to the conclusion that falling sales on the continent could have an impact on a rising UK market. Any managing director of a leasing company would not be doing their job properly if they were not cautious.”

While accurate used car price forecasting maybe virtually impossible it does seem that relative stability could ensue over the coming three or four years with pessimists predicting an average decline of 3-5% with any larger fall subject to excess new car volume, another economic downturn or a presently unknown factor.