Retailers faced with falling prices and changing consumer priorities

For a variety of reasons, more consumers than ever are choosing to switch to a used vehicle from new. Some will be motivated by cost, and others will be put off by long lead times or restricted choice. However, which used vehicle that will be in terms of affordability, driver requirements and zoning access needs are yet to be understood.

It stands to reason that the dominant influence today is the cost-of-living and energy crisis, and this will likely impact the EV market the most. Despite EVs now becoming a common sight on our roads - battery electric vehicle registrations in the UK grew by 40% in 2022, representing over 16% of all registrations – it remains the case that EVs are more expensive than their petrol or diesel counterparts and, for many potential buyers, there are genuine concerns about the true cost of running an EV now energy prices have risen.

Meanwhile, increased demand from both consumers and fleets, together with the need to progress towards long-term production targets, means most manufacturers have shifted their focus to EVs, so we’re seeing fewer new ICE vehicles available to buy and therefore registered. As a result, there will be an inevitable impact on the used market in time.

There is, of course, now a greater proportion of EVs entering the used market, and we’re starting to build a picture on appetite from dealers and consumers and residual values. What is already clear, however, is there’s significant work needed from all operators within the sector, including governments, not just on infrastructure but to increase the levels of confidence, education, and appetite for ownership of pre-owned electric vehicles.

There is increasing caution around residual values of EVs, resulting in above-market depreciation movements on those models and derivatives either in significant oversupply compared to market demand or not on a buyer shopping list. As a result, dealers are wary of the risk of stocking vehicles that may take a while to sell.

As some leasing companies review strategies for their EV fleets, others may choose to delay that transition due to uncertainty. But, as we have observed over the decades with combustion engines, given time, the supply, demand, and residual value uncertainties will settle and find their place in the market.

To conclude, it is clear the price acceleration and heights experienced throughout 2021 and early 2022 have begun to ease, and in some cases, show significant signs of depreciation.

2022 closed with a -9.4% movement in values at 3yr/60k, and 2023 begins with a further -1.5% downward movement at 3yr/60k, marginally ahead of the seasonal average of -0.9% and the 5-year average of -1.2%. Although December could be described as a typical seasonal finish, the general feedback from across the sector is mixed, and it felt more challenging than November.

However, the focus is clearly on Q1 and what's in store regarding optimism and the subdued economic outlook. With consumer confidence and demand under pressure, there are signs of weakness in margins appearing as overage product starts to appear. But overall, retail prices are holding as supply volumes remain constrained. In addition, there are signs that new vehicle supplies are increasing, albeit coming at a time when order banks and demand are easing, which is resulting in tactical registration activities and discounts appearing.

Building on recent used car figures, the market factors described in this article, and in line with previous Cox Automotive forecasts, we have adjusted our used car registration forecasts. Our forecasts are broken up into three scenarios – upside, baseline, and downside – each with its justification below.

Upside scenario 

• Used vehicle supply improves following increased new vehicle activity as a result of production recovery and an appetite by manufacturers to re-enter the lease, contract hire and rental sale channels.
• Increased change of ownership activity from more consumers and rental operators shifting from new vehicles to used vehicles.
• The actions taken to slow inflation and stabilise interest rates, along with initiatives to tackle both the cost-of-living and energy crisis, take effect in the early stages of 2023 and stimulate business and consumer confidence.

Baseline scenario

• The market continues to see a slow but steady recovery without worsening the current cost-of-living and energy crisis. As we observed in the final quarter of 2022, the result of steady but increased defleet activity as new vehicle supply increases.

• We see a slow and steady return to used vehicle depreciation whilst maintaining healthy retail prices and margin retention off the back of improving supply.
• Although buyer behaviours may be forced to change in terms of the brand, age and price of the vehicle of choice, we will still see a healthy number of transactions occurring.

Downside scenario

• The UK government’s initiatives to tackle inflation and interest rate rises don't have the desired impact on UK consumer and business spending, whilst we experience further pressure on the cost of living and energy crisis.
• Production recovery and registration activity do not accelerate to the levels expected. Therefore, we do not see improving defleet activity within the used vehicle sector.
• If the cost to change becomes out of reach for many buyers, we could see an increased appetite and need for consumers to refinance their current vehicle rather than settling the balloon or final payment at the end.