Heading into the last quarter of 2018, the timing is ideal to take stock of the state of residual values currently and what fleets may expect in the year ahead. Brian Murphy, VP of Research and Editorial for Canadian Black Book shares what Canada’s premier valuation guide expects in 2019.

Coming off a record setting 2017, when over two million new units were sold domestically, 2018 is proving to be another bumper year. From a new vehicle sales perspective, we could see the second strongest year on record, perhaps narrowly eclipsing the two million unit mark once again. At the time of writing, new car sales are down 0.8 per cent year over year, still very strong numbers despite being lower than the chart busting 2017 results. This record amount of new cars creates a used supply glut down the road, which will pressure values down. On the used side, sales are up this year by 5.6 per cent (in dollars) according to the latest StatsCan data. If this continues to the end of the year, the used car sales record set just last year may well be broken. Canadian Black Book (CBB) expects it will, assuming a new Canada-U.S. trade agreement is in place shortly.

An indicator of the health of the used market is the Canadian Black Book Used Vehicle Retention Index, which tracks the retained value of 2-6 year old vehicles and has illustrated strong results all year. For 2018 values have remained high and the Index has been highlighted by back-to-back record all-time retained value months in April and May. The Index is an ideal way for fleet managers to see how values of vehicles on average and vehicle segments perform over time. What’s important to understand is that today’s retained value performance is a critical input into Canadian Black Book residual values forecasting for the future. With that in mind, it is our opinion that retained values are at a peak now and will decline in the coming years. Values have strengthened on average about 4% per year over the last seven years. It is our expectation that those values will start to decline in 2019 at a similar rate, varying by market segment. Exchange rates are a key factor in setting new, used and residual values in Canada, and 2018 has been volatile on this front. Earlier in September the Canadian dollar was flirting with $0.83, a level that would typically compromise the volume of exported used vehicles to the U.S.. Subsequently, at that dollar value and lower demand, Canadian used car values would depress.

However, by the end of June of this year, the Canadian dollar was at $0.75, which essentially kept the flow of used cars moving down south and our used prices strong. At the time of writing the Loonie is holding at $0.76, which is still a reasonable rate for used exports to continue. BUT…if our currency does strengthen into 2019, this will certainly provide added downward pressure on used car prices here in Canada weakening future residual values.

Another dynamic playing on residual values throughout 2018 and definitely into 2019 is the White House administration and the outcome of NAFTA negotiations. Throughout 2018, this has generated a great deal of uncertainty throughout the industry and across North America. Given the current integration of the auto sector on the continent, the free movement of used vehicles depends on borders unrestricted by significant tariffs. If a drastic 25 per cent tariff were to be imposed on Canadian automotive exports, new and used vehicle pricing as well as residuals would be impacted swiftly. For used vehicles that could no longer viably be exported to the U.S., their values would decrease here at home. The price of select other used vehicles may rise significantly as Canadians shop the used market for a vehicle they can’t afford new, in the post-tariff world. Having a deal in place with the U.S. and Mexico provides much needed certainly for OEM’s planning new models and ensures that used product can cross the border, to the benefit of both buyers and sellers.

Coupled with the above elements, the state of off lease supply is and will continue to shape values in Canada. Record levels of new car sales will inevitably lead to record levels of used car supply in the future. Add to that, an estimated two million more off-lease vehicles per year expected in the States and a doubling of off-lease units here in Canada. Used supply is unarguably growing on both sides of the border and will prove to be a major factor in the upcoming fall of the price of used and forecasted residual values. Residual values have been strong in recent years, especially for trucks and SUVs. As consumer demand moves away from cars so too does the strength of their residuals. That said, during 2018, along with increased fuel prices came some strengthening in the used and residual value for compact cars.

Through 2019 and beyond (24-48 months) Canadian Black Book expects that, while questions still exist, the market will experience lower residual values. Higher supply driving prices down in the US is expected to reduce our used exports, putting residuals at risk. In addition, if the dollar strengthens significantly this could rapidly diminish residuals. If tariffs are imposed on Canadian auto exports, our market will shrink and residuals well dwindle. Fleet managers need to watch carefully and adjust to potential lower returns on investment, come replacement time.

 

0
0
0
s2sdefault
© 2019 First XV. All rights reserved.