ALG Examines How Housing Prices Contribute to Rising Residual Values

While touching on several elements of the nation’s economic standing, ALG took a deeper look at Canada’s housing market because the firm strongly believes home price growth can have a significant impact on residual values.

In fact, ALG determined a change in housing prices over a 48-month term can contribute a 0.2-percent rise in average residual value.

“Homes are most households' largest asset, and rising prices generate substantial wealth,” stated Geoff Helby, ALG’s regional director for Canada in the firm’s Industry Report for September/October.

“This feeling of wealth can lead to increased consumption, even if it is not being directly tapped to finance purchases,” he continued. “Higher wealth leads to increased residual values, as the demand for all vehicles increases.

“Conversely when home prices and wealth are declining, residual values can be negatively impacted as would-be buyers hold on to existing vehicles for longer,” Helby pointed out. “Home price forecasts were increased in the September/October edition to reflect continued strength in the housing market in spite of deterioration in the general economy.”

ALG acknowledged the Canadian economy has maintained its subdued pace of expansion in recent months.

The firm recapped that second quarter GDP growth was 0.5 percent, equal to the rate of expansion for the previous two quarters. This level was approximately equal to U.S. GDP growth, and “is reasonably strong given the current economic turmoil affecting most advanced nations around the world,” according to Helby.

Helby also highlighted that employment growth was solid in August with 34,000 new positions added. However over the past year, he calculated that total employment is higher by only 177,000 jobs, an increase of 1.0 percent.

The unemployment rate held steady at 7.3 percent, equal to the rate of August of last year, and down just 0.8 percent from August 2010.

ALG went on to mention that consumer confidence — a measure of how optimistic Canadians are regarding the current and future economic landscape — increased 6.7 points in September to 82.2.

Analysts contend the average Canadian household is expressing cautious optimism regarding their current and expected financial position and the short-term employment outlook.

After sharing that recent data, Helby turned his attention back to Canada’s housing market.

“Despite the most turbulent economic times in recent history, home prices in Canada have held up remarkably well,” he asserted. “This is in stark contrast to the U.S. where home prices have fallen substantially from the peak.

“There was a marginal decline in the average transaction price for a new home in 2009, but appreciation has been steady over the past three years,” Helby continued. “Prices hit a new high in 2011, and are on track to exceed that in 2012 by approximately 2 percent.

“This rate of appreciation is nearly equal to the rate of inflation, leaving the real price of homes unchanged,” he went on to share. “Our forecast for home prices in Canada maintains this trend with an average rise in home prices of 1.8 percent over the next six years.

More Factors Having Impact on Residual Values

ALG reiterated that other factors analysts monitor closely for their impact on residual values include wages and gasoline prices.

Helby indicated that the expectation is for gas prices to slowly rise, reaching $1.43 per liter by 2017.

As a result, he said impacts from lower gas prices bring the average 48-month residuals up 0.1 percent.

“However impacts vary by segment,” Helby maintained. “Microcars and subcompacts declined in value each by approximately 0.1 percent while full-size utility and premium full-size utility each rose in value by approximately 0.3 percent.”

Helby added that wages are expected to continue gradually rising by approximately 1.8 percent per year.

“There has been very little change in the wage forecast, leading to no change on average for residual values,” he noted.

ALG Review of New Products

The September/October Industry Report also included analysis on four new models from five different segments.

The following includes commentary from ALG as well as residual value projections.

2013 Acura RDX

Acura’s follow-up to the first RDX tones down its energetic entry crossover, giving it a more conventional — and refined — V6 engine, as opposed to the old turbo four, and growing its dimensions to give it a more spacious and comfortable interior. The AWD system is also more conventional, no longer the active Super-Handling AWD that had made the first generation such an impressive handler. The V6 is rated at 273 hp and 251 lb-ft of torque, but the real upgrade is in fuel economy, where the new engine gets up to 7.3L/100 km highway, thanks in part to the new 6-speed automatic transmission. The RDX is more expensive than the outgoing model, but price still comes in below the heart of the segment.

The premium compact crossover segment has become even more competitive since the first RDX launched, so while this generation is more in line with the competition, it may be difficult to pick up share.

2013 Chevrolet Spark

Manufactured by Daewoo and sold across the world, Chevrolet’s first-ever Canadian microcar entry stems from a 2007 Detroit Auto Show design contest. Despite 364mm shaved from the length, Spark retains a surprising portion of the passenger space of the Sonic, its subcompact sibling. Aimed at urban Gen Y buyers, it sports a motorcycle-themed instrument panel and comes available with a rather slick MyLink infotainment system. A 1.2L I4 puts out 85 hp and 82 lb-ft, buzzing to 96 hm/h in 12.8 seconds.

More conventional than the smart fortwo and Scion iQ, the Spark will more likely be cross-shopped against subcompact segment offerings than peers. Its base pricing is within ~$1,000 of Sonic, and fuel efficiency is only marginally better. Cheap, cheerful, and room for four make for a strong purchase proposition at first glance, but the Sonic sitting next to it in the showroom is more substantial, more roomy and much faster.

2013 Ford Mustang

Ford’s hot-selling Mustang is facelifted for 2013. The front end gets a more aggressive grill and splitter, and the rear gets a glossy black panel. A newly available Pony Package with delight with trick projection lights emanating from the side-view mirrors, surprises and delights with “show,” while a new Brembo Brake Racing Package can upgrade the “go.” Automatic transmission buyers can finally select gears, although the thumb switch isn’t particularly sporty. Powerful V6 and V8 engines largely carry over from 2012; the GT sees an 8 hp boost to 420 total. For 2013, the Shelby GT500 bests the Camaro ZL1 with a staggering 662 hp and claimed 200-mph-plus top speed.

The bold decision to standardize HID headlights with LED bars and smoked LED taillights differentiates this Mustang from its predecessor, looks very cutting edge and enhances residual value to boot.

2013 Nissan Altima

Preserving a top-5 spot on the Canadian midsize segment leader board is far from easy, but Nissan hopes to raise the bar with the redesigned 2013 Altima. Emphasis was put on fuel economy over power, as a 32kg diet helps the 2.5L achieve 5.0L/100km highway. Sporting seriously comfortable, NASA-developed seats, the Altima interior feels considerably more premium than before. An available 7-inch touchscreen display is the driver’s portal to a new-generation Nissan Connect infotainment system, which can read texts and even send replies.

Altima’s decreased MSRP/content ratio should benefit Altima in maintaining high volumes as well as healthy residual values.