As it turns out, the peak in off-lease car volumes will likely be here sooner than once thought.
And the growth in lease returns is slowing down and “no longer posing a threat to the market,” Cox Automotive chief economist Jonathan Smoke said in a call with reporters and analysts earlier this month.
Following what’s expected to be approximately 3.9 million lease maturities this year, the market should cap out at 4.1 million lease returns in 2019, according to an analysis on the wholesale vehicle market from Cox Automotive.
Lease maturities for 2020 are expected to then decline to 3.9 million, followed by 3.7 million in 2021, 3.6 million in 2022 and 3.5 million in 2023.
Or as Smoke put it: “The growth in off-lease maturities in decelerating.”
From 2014 to 2017, lease maturities climbed from 2.2 million to 3.5 million, representing the “peak growth years” in off-lease volume.
And the peak volume year is now likely to happen in 2019, instead of the previously expected 2020.
During the Q&A portion of that July 9 call, Bank of America’s John Murphy observed that expected lease returns for 2019 are lower than previously projected based on lease originations in 2016.
Smoke then confirmed Murphy’s hypothesis that automakers have, in fact, shifted the maturities of leases.
Cox Automotive has “revised our estimates because we have focused on getting far more precise at understanding the actual duration of those leases,” Smoke said.
“And previously, we had been seeing a stronger mix of two- to three-year leases,” he said. “It’s now shifted a bit more to three- and even a growing number of four-year leases.
“And that’s causing some of the shift in the pattern, and the absolute peak for a while we were projecting would be in 2020. Now we’re actually seeing the peak falling more in 2019,” Smoke said.
At the crux of this shift is the “dramatic increase in lease payments,” Smoke noted.
And one way automakers can control the rising lease payment is by making lease contracts longer.
OEMs do ‘anything they can’ to control payments
In addition to vehicle price and interest rate/money factor, a key driver of lease payment is the residual value forecast, he explained.
With residuals — “especially residual forecasts” — having dropped “substantially” from their 2014 high, lease payments on average have climbed about 6 percent year-over-year, Smoke said, citing Dealertrack data.
“I think the manufacturers are doing anything they can, including a heavy amount of lease subvention, to help control what otherwise would be an even higher price,” Smoke said. “Because behind the scenes, we’re seeing less leasing of cars and more leasing of luxury and more leasing of SUVs as part of that mix.”
Case in point, the 2017 Honda Accord was the most popular lease observed in the data in June 2017, he said, again citing Dealertrack data. The 2018 Nissan Rogue was the most popular this June.
In a separate analysis, Cox Automotive notes that leasing now has less of a “cost advantage” than it once did compared to auto loans. As such, lease penetration has declined from a peak of 32 percent in 2016 to a range of 25 percent to 30 percent since then, the analysis said.
‘No longer a threat’
In the Q&A portion of the call, Smoke also expanded on the notion that off-lease volume will no longer be a real risk to the market. He also touched on the projection that more dealers would try to retail off-lease units and the impact on used-car pricing.
“I think that off-lease is both positive and supportive of continued strength in (used-car) pricing, but it’s also clearly changing in terms of the amount of increase is no longer posing a threat to the market, which at the end of the day is generally supportive of pricing,” Smoke said.
“But we are seeing the mix of those vehicles shift; but the attractiveness of the vehicles that consumers most want likely is meaning that as we progress, fewer and fewer of those vehicles are actually reaching the auction,” he said.
“So, the effect on the market overall is that the market continues to be very dependent on off-lease. The No. 1 model-year represented for the last several years has been 3-year-old vehicles,” he said.
“And we don’t project that to change, because it’s only off-lease that’s actually growing in share, even though it’s decelerating. So, its importance to the auction, its impact on the price index because of the composition of vehicles reflected, continues to be positive,” Smoke said.
However, given the slowdown in off-lease growth coupled with a strong “attractiveness” in that volume, it’s likely to mean that the grounding rate among dealers will continue to climb as they try to sell those lease-end vehicles to retail used-car customers, he said.