Used car forecast

In an era of increased demand for commuting vehicles, with public transport falling out of favour due to the pandemic, the used car market is more important than ever. Although clearly not universal, for some, the past few months have increased disposable income, with holidays cancelled and a reduction in commuting costs. Alongside concerns over virus transmission on public transport, this led to an increase in demand for good quality used vehicle stock. 
In a Cox Automotive Sentiment Survey in Spring 2020, more than a third (35%) of dealers said they intended to increase their used stock profile as a consequence of COVID-19, while almost two fifths (37%) intended to increase the mix of lower-priced cars. Judging by the state of the market as 2020 comes to an end, this projection has been realised – albeit within the context of supply constraints. 

Wholesale used car supply had seen constraints prior to 2020, with the impact of challenges to the new car market making themselves felt in the reduced numbers of good quality used vehicles coming to the market. The spring 2020 lockdown and the subsequent production and logistics constraints hastened the trend towards greater digitisation of the sales process (see section 4: Leaping into digital retail).

As already noted in earlier sections of this report, the COVID-19 pandemic is not the same as the financial crash of 2007/8, where the UK automotive industry experienced severe disruption to trade values across the wholesale sector. This time round, valuation guides and the broader industry are to be commended for taking a pragmatic view towards reflecting supply and demand in a period of little or no activity.

Supply of quality, retail-ready, used cars was already limited before the challenges of pandemic restrictions, due to pressures on the new car market. As such, values were holding strong compared with the same period in the prior year. Since reopening after the spring 2020 lockdown, this has resulted in continual strength and demand. However, the uncertainties and risks around unemployment, business and consumer debt, and the longer-term recovery of the UK economy mean there may yet be heavy pressures on demand. The second lockdown period is also having an impact.

Current levels of used car values are, arguably, not sustainable. In the medium to long-term, realignment of those values is likely, and used cars will return to a representative percentage of the new price. Continued investment in the retail and wholesale used car sectors, combined with the growth of large groups and supermarkets, will drive continued demand for stock, even as the values realign.

"The current strength in the used market prior to the latest lockdowns was always likely to flatten out, as pent-up demand was satisfied. Indeed, supply and demand will always define the used vehicle market, particularly when it comes to values. Following several years of external influences on the sector impacting the standard depreciation of used cars, we could be in a period of unseasonal value movements as the market adjusts.

"The increase in online efficiencies and transactions at every stage of the used vehicle journey continues to expand the reach and access for buyers and vendors alike. The potential market for used vehicles is both bigger and more targeted. However, a realignment is coming around the impact from COVID-19, WLTP and RDE, as well as Brexit and the CAFE Regulations.

"It is possible that supply will increase into 2021, with extended fleet vehicles being returned and some consumer finance deals terminating early due to unemployment or other financial conditions. As consumer confidence remains fragile, it may well be that demand doesn't quite match the levels of supply, impacting on potential values to be realised. However, we do not foresee a collapse in values."

Albeit challenging to see much further beyond 2020 at this stage, work has also been done to extrapolate movements in the used car market should the anticipated recovery take three years, five years or seven years. We know that, after the financial crash of 2007/8, it took seven years for new and used markets to recover to pre-crash levels. There were seasonal fluctuations and the new and used markets experienced varying degrees of recovery.

The charts illustrate, building on the insight gained from the financial crash recovery trends, how used volumes could look if the recovery were to take the same seven years, or take place earlier. Based on the earliest of those, the expectation is used car transactions will not exceed the 2001-2019 average until 2023. Logically, this milestone would not be met until 2025 or 2027 in five and seven-year recovery scenarios.