After rising during most of last year, used-car prices continued their upward trek during the last month of 2013, climbing by 2.5 percent on a monthly basis. And though used-vehicle prices rose by 4.3 percent in December on a year-over-year basis, RVI provided some good news for the future in its latest RVI Risk Outlook.
Though dealers will have to suffer through a few more years of high auction prices, a turning of the tides may be in sight.
Used-car prices are expected to see year-over-year declines starting in 2015, and are predicted to decline around 1.6 percent from current levels through 2017, according to RVI data.
Here’s the outlook from RVI for the next few years:
Used-car rates are expected to remain strong through 2014 as exchange rates are expected to remain lower than the past few years.
“As the U.S. Federal Reserve began scaling back its stimulus spending in January, expressing confidence in the U.S economy, exchange rates began falling,” RVI analysts said.
As of Jan. 28, exchange rates were at $0.897 US/$CAN.
Looking forward, RVI explained that used-vehicle supply is expected to increase through 2019, which will serve to put downward pressure on used-car prices.
“Although a lower forecasted exchange rate has a positive effect on used-car prices, the increasing used vehicle supply will still result in lower used-car prices,” analysts said.
These predictions might act as consolation to dealers who are in for another year of strong wholesale prices, according to ADESA’s chief economist Tom Kontos.
In the U.S., the end of 2013 coincided with a loosening of used supply, due in part to an influx of off-lease vehicles, and consequently, lower prices in the lanes.
Kontos said Canadians are on track to enjoy the same relief — just not yet.
He explained that Canada is “lagging” behind the U.S. in terms of recession recovery for the used market.
“The main point is the off-lease volume, and volumes in general, is at a low point right now (in Canada). The supply is low, which is keeping prices relatively strong in the wholesale market,” Kontos said, explaining that the U.S experienced the same struggle during the 2010–2012 period.
Only in late 2013 did the U.S. begin to see recovery in off-lease volumes.
“In Canada, the recovery in supply is not expected to be felt until beyond 2014. So, 2014 looks to be another year of relatively strong wholesale values,” Kontos said. “Canada is still going through the period of tight supply, which is holding up used-car values.
During the last month of 2013, wholesale prices did rise on an overall basis — a trend dealers experienced during most of last year — but the spike was slight, and price movements for most segments were negative.
According to the ADESA Canada Used Vehicle Price Index, powered by ALG, wholesale prices rose by an average of 0.2 percent month-over-month in December.
This rise contributed to an overall 4-percent increase in wholesale prices for 2013, according to ADESA Analytical Services.
But despite the slight uptick in December, price movements were negative for most segments during December.
Midsize cars declined at the fastest rate, perhaps not surprising as winter weather takes hold. This segment fell by 5.9 percent or $473.
The midsize cars were following by the mid-compact cars (down 5.9 percent or $365), fullsize pickups (down 2.3 percent or $334) and compact SUVs (down 2.1 percent or $232).
Among the segments that saw increases was one dramatic market correction.
The minivan segment corrected after declining dramatically in November, according to the Index, rising by 20.5 percent ($1,301), while midsize SUVS also increased by 2.5 percent ($349)
Though analysts offered no short-term good news in regards to Canadian leasing levels, movement in the new-car market could spell more off-lease vehicles in the future.
That is, if OEMs are able to turn consumers away from long-term loans and point potential buyers toward leasing.
New-car sales in Canada are soaring. Why is this important to the remarketing industry?
Well, of course, “Everybody knows that to be a used car, at some point it has to be a new car, as well,” Brian Murphy, senior manager Senior Manager, Automotive Practice – Canada at J.D. Power and Associates, told Auto Remarketing Canada laughingly.
So fundamentally, any significant changes in the new-car market affect the used-car market, as well.
The overwhelming trend in the new-car industry this year has been a shift toward long-term loans — 72 months or greater.
According to J.D. Power and Associates data, in 2008, Canada saw slightly over one third of new-car loans coming in at 72 months or longer.
In 2013, as of early November, the long-term loan penetration rate had almost doubled to rest at 63 percent.
“What that means is that if a consumer finances a car for 96 months or more, which is about 9 percent of Canadians, it causes them to keep the car slightly longer,” warned Murphy.
“It simply means that car won’t turn over into the used-car market as early as it once had.”
This has the potential to create even more supply pressure on used cars simply because there may very well be fewer new cars returning to the market.
“A lot of this depends on what incentives the manufacturers put in place in the marketplace to get a consumer out of the car they bought years ago and into a new one,” said Murphy.
“If long-term loans fundamentally change consumer behavior and cause them to keep the car even just a year longer, it decreases the number of cars that are leaving the hands of the first-time buyer for the used-car market,” he continued.
How Does this Trend Relate to Leasing?
Well, first we have to take a look back at leasing trends during the past few years.
As leasing penetration fell off the cliff in 2008, it has “never really come back,” said Murphy.
Instead, consumers have begun to take note of new-car and long-term loan incentives being pushed by the manufacturers during the worst years of the economic downturn.
According to J.D. Power data, around the end of 2007 leasing penetration in Canada was hovering at around half of the vehicles that made it off dealers’ lots, which, of course, meant a good supply source of used vehicles.
“We all knew those were coming back in three to four years. And they probably make good used cars,” Murphy added.
But once leasing rates fell, penetration hovered at about 15 percent until the end of 2010, after which rates crept up slightly.
That said, since the drop-off, leasing penetration rates have only reached above 20 percent once, Murphy said.
ADESA chief economist Tom Kontos explained that one can look at U.S. leasing trends a couple of years back to better understand where the Canadian market stands today.
“We are seeing the Canadian market follow a similar track as the U.S., but just a couple of years behind. We saw low leasing levels in the U.S. in 2011, 2012 and into 2013, and they have just begun to pick up,” Kontos said. “Canada still has a year or two of low leasing penetration levels in store.”
Now, Murphy said, leasing penetration in Canada sits at about 17.5 percent, “so three years from now that won’t be a good story as far as used supply of cars goes.”
Can Manufacturers Create The Shift?
That is, unless manufacturers can switch consumer interest back to leasing — or if they feel the need to.
“How it relates to leasing is that I think there is a risk to the business overall to keep a consumer in a car for that long, so manufacturers are starting to look at leasing perhaps as a way to control when customers come back into the market,” Murphy said. “So if they take that on as an antidote to long-term financing, then leasing could pick up.”
But it all depends on if the manufacturers see high long-term loan penetration rates as a problem.
Murphy said it is possible they will, noting, “If you put consumers in cars for seven or eight years, it’s really long down that path that they will be in a positive equity position on the car, which makes it difficult to get them out of it.”
If OEMs are troubled by this trend, they will most likely push incentives up on leasing, which may in turn push leasing levels back closer to pre-recession levels, spelling a potential used-supply surge for the remarketing industry.
That said, Kontos warned it is going to take quite an incentive push to break habits and turn consumers back toward leasing.
“If OEMs turn their focus to lowering the level of long-term loans, it is going to take a big push on leasing incentives to switch customers over. And it might not work right off the bat; customer habits can prove hard to break,” Kontos said.
And it may not be soon, as consumers looking to manage their monthly budget and try to pay the least amount possible for transportation are taking advantage of long-term loan options.
“I would also say these long-term loans, coupled with what we call irregular payments, with the ability to pay biweekly or bimonthly, allow the manufacturers to advertise in the paper extremely attractive financing offers. It looks really great on paper,” Murphy said.
“It’s a wonderful marketing message and it helps with traffic. I think this is one of the reasons that Canadian automotive industry is headed towards a record year if things keep going as they have been. These long-term loans and very low interest rates are luring consumers to the showrooms, and it’s working,” he continued.
That said, time will only tell how sustainable the practice is, and what perhaps some of the negative effects will be.
Though slight, the report stated used market supply is forecasted to rise slightly.
And new-vehicle sales in October were the highest on record, according to ALG, the fourth consecutive month of record sales.
This, of course, is also good news for pre-owned dealers, as these new-car customers may come back with trade-ins in the coming years.
ALG is predicting the expected bump in supply to have an overall negative impact of .05 percent on residuals.
That said residual changes by segment due to expected increased supply will range from -0.5 to 0.4 percent, according to ALG.
The premium subcompact, subcompact and compact utility segments are expected to display the largest negative impacts of 0.4 percent to 0.5 percent.
On the other hand, the sporty segment will show the largest positive impact of 0.4 percent.
“The total (residual) movement including macro-economic and used supply adjustments for the edition averages roughly -1.1 percent in the 48-month term, with variations among the segments,” ALG officials said.
The report also pointed out this number is slightly more negative compared with expected changes, depreciation and seasonality, of -1 percent.
This news comes on the heels of the latest RVI Market Update for Canada that was released last week.
The RVI report also held some good news for dealers, as it showed used-car prices in Canada fell slightly in October, going down 1.8 percent when compared to September.
Though the end of summer brought a respite from the spiking wholesale prices that dealers have suffered all year, it seems rates are on the upswing once again.
According to ScotiaBank’s Global Auto Report, Canadian used-car prices “picked up” in early October.
The report also shared some factors behind the price increases, that may not come as a surprise to the industry.
And the report explained that used-car prices will “remain strong in coming months due to ongoing tight supplies of pre-owned models.”
This prediction comes off of a mild reprieve for dealers, as used-car prices fell a bit as summer came to a close.
According to the ADESA Canada Used Vehicle Price Index powered by ALG Canada, wholesale prices fell on average by about 0.5 percent month-over-month this August. And price movements were negative for nearly all the segments.
RVI’s Risk Outlook Newsletter shows a bit higher of a decline, as officals reports used-car prices fell by 2.9 percent in August from July’s rates.
But the reprieve was short lived.
Carlos Gomes, Scotiabank's senior economist and auto industry specialist said, “In Canada, car and light truck sales set a third consecutive monthly record in September. In addition, used-car prices picked up in early October alongside the recent expiry of enhanced incentives on several new vehicles, and will remain strong in coming months due to ongoing tight supplies of pre-owned models.”
Much of this shortage of volume is being caused by what Scotiabank coined “plunges” in fleet and leasing volumes.
In fact, according to the report, leasing volume for 2009-2010 came in at an average of 350,000 units, which is less than half the volume seen during the previous decade.
Now, Scotiabank said rates are up from Great Recession lows, but in 2012, fleet/lease volume came in at 577,000, still 30 percent below pre-recession norms.
Dealers are definitely still feeling the effects of fewer off-lease vehicles coming on to the lots in Canada.
Interestingly, Scotiabank also shared that the supply situation in the U.S. is affecting the Canadian market, as well.
Since the U.S. is experiencing a tight supply environment, as well, Scotiabank contends this is stopping the flow of pre-owned vehicles imported into Canada from the U.S., which has dropped considerably.
And as used-car prices go up, new-car prices are on the way down — bringing pre-owned and new prices dangerously close.
This trend is made apparent, as new car and light truck sales are predicted to reach a record 1.72 million units this year, Scotiabank reported.
It seems manufacturers are set on making these units more affordable, which in turn could have a negative effect on used-car sales, as prices continue to rise in this market.
With increased incentives, new-vehicle prices in Canada have fallen by 5 percent since the beginning of 2013, according to the report. And this marks the fifth year in a row that automakers have ramped of incentives on new cars to push sales.
But it’s not all bad news for those in the used-car market.
Scotiabank did provide some good news for dealers looking forward.
Although off-lease vehicle supply is tight, some loosening is expected to being in 2014.
Scotiabank contributes this loosening to the new-vehicle sales recovery from recession lows, a turn of events that is predicted to “increase the supply of pre-owned models for the first time since 2009.”
But there’s a caveat.
“Nevertheless, we estimate the supply response will be modest, and lease returns will remain well below pre-recession levels for an extended period,” Scotiabank indicated.
According to RVI’s latest Risk Outlook Newsletter, used-car prices are expected to decline between 2015 and 2018, as well.
“Used vehicle supply will increase between 2014 and 2018. This puts downward pressure on used-car prices and will result in year-over-year declines starting in 2015,” RVI reported.
RVI predicts that used-car prices will decline by around 2.4 percent from current level through 2018.
Kia Canada Inc. announced a new online tool for dealers, fleet and rental partners that should make acquiring pre-owned and CPO vehicles a bit easier in this tight supply environment.
Kia has partnered with web-based auction AutoGavel Exchange — powered by North Toronto Auction — to offer another online inventory option for dealers.
The website — www.agx-kia.ca — was launched this past July and offers Kia franchises dealer’s exclusive services and access to inventory from Kia Canada, daily rental companies, fleet management companies, auctions, other dealers and, in the future, the Kia Canada lease returns, the company explained.
And though leasing has not picked back up to pre-recession highs in Canada, off-lease vehicle still serve as an invaluable inventory option for used and CPO sourcing and stocking.
Richard Pasta, manager, national fleet sales, remarketing and CPO for Kia Canada, said, “In efforts to bring full circle to our remarketing, fleet and CPO programs we elected to go to market in search for an online ‘auction’ provider/partner. The team at NTA (North Toronto Auction) welcomed the project and agreed to assist KCI (Kia Canada Inc.) with our online solution and vision.”
On top of having access to exclusive inventory, the company explained Kia dealers can also ramp up their CPO programs by “exchanging” inventory with other dealers.
George Lykopoulos, manager, national fleet sales, remarketing and CPO for Kia Canada said, “This site provides KCI with a controlled remarketing channel geared toward our dealer network. With the capabilities of enhancing CPO sales, fleet sales and retail lease returns.
“This allows our fleet partners to remarket their Kia vehicles back to the Kia dealers and is a great tool that has the versatility to be used in any fleet clients remarketing process. Functionality of the site along with its flexibility and ease-of-use are the reasons in which we are excited about the future of the KCI-AGX relationship,” he continued.
For more information about the new offering, dealers can contact Gerry Johnson, corporate account manager at North Toronto Auction, at gjohnson@northtorontoauction.com.
Below is a screenshot of the new site for Kia Dealers:
Automotive digital marketing company Strathcom Media recently promoted a new way for Canadian dealerships to increase their online exposure.
With its new syndicated data service, the company says dealers can “increase the online exposure of their inventory without increasing their budgets.”
The Used Cars Canada (UCC) Network (usedcarscanada.com), allows dealerships to post their vehicle inventory online for free and have it syndicated, or displayed, across a large network of websites.
These partners include trovit.ca, OLX.ca, carsgone.com, LemonFree.com, CanadianBlackBook.com and AUTOandTRUCK.ca.
The company explained the new offering was designed to provide Canadian dealerships with free vehicle syndication for online postings.
On the used end, potential buyers can search for vehicles on the UCC Network by make and model, price, mileage, year and body-type or search for a car dealership by location.
The UCC Network currently has more than $720 million in vehicle inventory displayed on its primary domain, the company reported.
Cochran also stopped to explain the reasoning behind a free third-party syndicated site: “A simple belief in providing value to dealers by generating free leads. Working with dealers around the country I have always been asked ‘How can we generate more leads without increasing our budget?’ Used Cars Canada is our answer.”
Though Used Cars Canada has been in existence for several years, Cochran explained the company is now actively promoting it to dealers and consumers.
“Moving forward Used Cars Canada is going to be getting a complete makeover not only from a design and usability perspective but from an SEO and SEM perspective as well,” Cochran said. “Part of our strategy is to make sure that consumers can find the site and browse the vehicles. We are actively working on increasing the number of visitors to the site each month.”
And dealers should expect mobile offerings to follow shortly.
“In our opinion an excellent mobile experience is now a prerequisite for websites. With the new design will also come a brand new mobile site,” Cochran said. “As for an app it is on the radar but the mobile site will be coming first. “
