Used-vehicle future values: Getting them right matters

John Hughes, MD, Mann Island Finance

Right now, the used car market is in an unusual place. While a number of consumer publications have published stories highlighting concerns about the potential impact of environmental issues on used vehicle values, notably diesel, prices have remained strong.

The question remains; can this be sustained?

It’s clear that demand for quality used stock is strong from dealers right across the UK. The latest BCA Pulse report has highlighted that average values for fleet and lease cars and dealer part-exchange vehicles are continuing to see prices rise. This is being matched by consumer interest. Even in a competitive market, the price of used cars has reacted to the higher prices dealers have had to pay. A key solution has been finance.

The overall market for dealer used-finance rose 11.7 percent in 2017 and has continued to rise in 2018. Central to this growth was the success of used car PCPs, which grew by 21 percent and now account for 49 percent of used car finance, slightly more than Hire Purchase.

What we can see is a clear symbiotic relationship between finance, notably access to PCPs, and used car sales, sustaining this link will require careful balancing of residual values and the ‘loan-to-value’ advance issues. Getting this right is essential for all parties; the dealer, finance company and end customer. The pivot to achieving the right balance is finance companies. Right now, all lenders are operating in unusual circumstances.

In the past, the used car market has seen fluctuations in used values, which have primarily been linked to economic factors. Economics remain in play as an issue, notably via Brexit, but what we also have to contend with is the growing influence of environmental factors.

Right now, three factors are driving up used car values:

  • WLTP has seen supply disruption for many brands and created a shortage of nearly-new stock
  • WLTP has also seen many fleets hold back from changing parts of their fleet; this is reducing used car supply in the 3 to 4-year age category
  • The slowdown in new car sales over the last 12 months has seen greater interest in used sales activity from franchised dealers

Less supply and increasing demand is a recipe for rising prices

It is clear that the impact of WLTP will continue to feed through during the months ahead. The lingering impact will see continuing supply issues and similar fleet-purchasing concerns while tax and benefit-in-kind implications are fully clarified. Perhaps, the other related matter is the switch in production from non-WTLP cars towards EVs.

A shift in new car supply to EVs and a ‘surge’ in consumer demand for used EVs, reported by CAP HPI and Auto Trader, has implications for future values of diesel and petrol cars. Increasing ranges, a widening charging network, lower running costs for many and the potential for ‘toxin taxes’ in many urban locations, all underline why electric is such a potential disruptor to future values.

Forecasting future vehicle values is increasingly complex

‘Past performance is not an indicator of future outcomes’ to quote a line used in other areas of financial services. It requires a carefully considered approach that is directed mainly by trade valuation experts, rather than industry enthusiasts like me! However, as a business with a deeply embedded history and breadth of experience within the industry, I believe that it is right and proper that we should have a considered view.

Right now, our approach is one of commercial prudence and agility and we expect this to be echoed across the lending market. I’m not expecting EVs to simply flick a switch and turn off the lights on petrol and diesel cars. The likelihood (and my preference) is that there will be a steady and controlled dimming.

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