The year of the used car – again?
In this section, we discuss the primary factors driving the current used car market and share our latest used car forecasts.
The new and used vehicle markets share a symbiotic relationship that often means one cannot experience struggles without the other experiencing the same. This has never been more apparent than during the last two years in the used car market, where continued new car supply problems have applied never-before-seen pressures on the availability of used cars, and most importantly, values.
As we enter a new year – one in which most were hopeful of global supply issues improving early on – it seems increasingly likely that we will see a continuation of many of the market dynamics we saw in 2021. Although there are signs of new vehicle supply returning, it is currently very dependent on those manufacturers who have managed to secure the necessary materials to build vehicles and therefore keep production lines running. And even then, those manufacturers can only fulfil quotas on select models and derivatives.
It therefore seems that new car supply problems will continue until 2023. So what does this mean for the used car industry?
Both 2020 and 2021 were the years of the used car. With the existing new car supply challenges yet to be resolved, there is no reason for 2022 to be different.
Used car market – familiar territory
A lack of new car supply means fewer vehicles are entering the used market. Fewer vehicles mean more wholesale competition, driving up values and increasing retail prices. Sound familiar? That’s because it’s the exact situation our industry has become accustomed to since the reopening of showrooms in the summer of 2020.
This effect can be most keenly felt for nearly-new vehicles – those that are between zero and two years old – as leasing and rental companies have held on to stock that would usually enter the wholesale market.
While manufacturers are slowly getting to grips with their production issues, and the situation will improve as the year progresses, this will be a prolonged and gradual process. As a result, we will not see a flood of stock enter the market, but rather a gradual increase as the backlog of orders for new vehicles gets cleared, in turn generating much needed stock for the used market.
As mentioned in the new car section, the market that emerges once the pandemic ends will be rather different than before. In the two years since the pandemic began, the push for cleaner and greener technologies in vehicles has accelerated massively off the back of increased government pressure and legislation around the world. As a result, the flow of alternatively fuelled used vehicles will only increase and this brings its own set of complexities for supply chains.
What will happen to used car values?
Used car values have, until very recently, climbed to unprecedented levels at a rapid pace. Towards the end of 2021 though we saw the rate of growth begin to plateau; it was inevitable used car values would eventually hit a ceiling.
As the chart below illustrates, the strength of the market has been in the zero to one and one-to-two-year age brackets. These vehicles, supplied mainly by the leasing and contract hire sector, have seen the biggest demand, coupled with reduced supply, as companies extend contracts rather than renewing their fleets, starving the wholesale market, and driving prices upwards.
Source: Manheim data compared as values against OCN (Original Cost New inc. VAT)
The concern is that values will start to decrease at a time when profitability per unit is more vital than ever, but current supply and demand levels won’t allow that to happen. As long as new car supply issues continue and used cars continue to be dripped into the market rather than released like a tsunami, then natural market dynamics dictate that values will remain at current levels.
Over time, as supply issues are resolved, we do expect values to decrease. But this will be a gradual process and at a much slower rate than many fear. So there certainly is no reason for unnecessary panic.
The used van market
“On the back of a surging new LCV registration period in Q4 2021, 2022 has started much more positively regarding auction defleet van volumes. As a result, I predict used van volumes to be around 15% stronger in Q1 2022 v. 2021 averages. Additionally, the early stages of the year have a different feel than the relentless pent-up buoyant market dynamics we have all witnessed over the past 18 months. The market starts to balance out record wholesale price levels versus subdued retail activity being observed and reported in the early stages of January.
Price sensitivity challenges are evident as vans today are still on average 66% stronger than pre-pandemic levels, retail patience and overall dealer cash flow confidence are crucial for Q1 performances as the market settles into new year proceedings. Prices will ease in the first quarter, especially in the Euro 5 and higher mileage categories, as more volume hits the wholesale market.”
Matthew Davock, Director of Commercial Vehicles,
Manheim Auction Services
Used car forecasts – Q1 and Q2 focus
Building on recent used car sales, assumptions for the remainder of 2022, and taking into account the factors mentioned above, we have adjusted our forecast for used car sales in 2022.
Our best-case scenario sees Q1 2022 ended on 1.956 million transactions, a +15.9% increase year-on-year, +4.2% up on the 2001-2019 average, and -3.2% when compared with the most recent pre-pandemic 2019 performance.
In this scenario, Q2 2022 ends on 2.003 million transactions, -7.6% year-on-year, +4.2% compared to the 2001-2019 average, and -1.5% compared to 2019.
Our mid-case scenario sees Q1 2022 ended on 1.903 million transactions, a +12.8% increase year-on-year, +1.3% up on the 2001-2019 average, but -5.8% when compared with the most recent pre-pandemic 2019 performance.
In this scenario Q2 2022 ends on 1.948 million transactions, --10.1% year-on-year, +1.3% compared to the 2001-2019 average, and -4.2% compared to 2019.
Our worst-case scenario sees, Q1 2022 end on 1.790 million transactions, a +6.1% increase year-on-year, but -4.7% down on the 2001-2019 average, and -11.4% when compared with the most recent pre-pandemic 2019 performance.
In this scenario Q2 2022 ends on 1.833 million transactions, -15.4% year-on-year, -4.7% compared to 2001-2019 average, and -9.9% compared to 2019.
Source: Cox Automotive
Used car forecast - 2022 full year
Our best-case scenario for 2022 sees the year end on 7.701 million used car transactions, a +4.2% increase on our year-on-year 2021 forecast of 7.392 million. This would be a +4.4% increase compared to the 2001-2019 average, and a -3.0% decrease compared to 2019.
Our mid-case scenario for 2022 sees the year end on 7.504 million transactions, a +1.2% increase on our year-on-year 2021 forecast of 7.392 million. This would be a +1.7% increase compared to the 2001-2019 average, and a -5.4% decrease compared to 2019.
Our worst-case scenario for 2022 sees the year end on 7.103 million transactions, a -3.9% decrease on our year-on-year 2021 forecast of 7,392 million. This would be a -3.7% decrease compared to the 2001-2019 average, and a -10.5% decrease compared to 2019.
Source: Cox Automotive
The US perspective
“The used market in the US will see very different market trends in the first half of 2022 compared to the second half. The first half will most resemble the prior year as supply remains very tight, and a very strong tax refund season is expected to drive peak demand in the spring. As a result, used vehicle values are likely to see one more run of price increases, peaking in April or May. After the spring, demand is likely to slow as new vehicle supply starts to improve, removing some of the additional demand in the used market. The second half of the year will see slower used sales and above-average depreciation in values. For the full year, the market is likely to see volumes come up short compared to the record volumes achieved in 2021, and by December, used vehicle prices are likely to be down modestly year-over-year. However, a major used price correction is not likely, as demand will remain relatively robust, and the supply of new and wholesale vehicles will continue to be constrained.”
Jonathan Smoke, Chief Economist, Cox Automotive Inc