THE Market: Forecasts and PROJECTIONS

Used car forecast

A tale of cautious optimism or it could be worse!

Continue reading

The importance of the used market

Prior to the first nationwide lockdown in early 2020, the used market was in continued decline from its 2017 peak of 8.1m units. During the spring lockdown period, used car sales fell away almost entirely, with dealerships and car supermarkets closed for business from late March to at least June. By the end of September, used car transactions were down –17.5% year-on-year according to the SMMT (2020). 

However, after reopening, pent-up demand was released, and used sales were robust, with values exceeding expectations in many cases. It is clear, however, that values need to realign from their current highs, particularly in response to the second lockdown period across the nations of the UK – from firebreak lockdown in Wales, five-level restrictions in Scotland and new National Restrictions, most commonly referred to as a second lockdown, in England.

NFDA summarises the dealer return to work experience

  • In the used sector, 83.2% of dealers saw a larger volume of online enquiries and 55.45% saw an increase in online used car sales. By August, 84.9% of dealers had seen a further increase on online enquiries for used vehicles, with 74% seeing an increase in conversions from enquiries.

  • In July, nearly three in four dealers said more customers were booking appointments prior to visiting. By early August, a third (37.8%) of respondents had seen an increase in footfall for used cars, up to 25% higher than pre-lockdown.

Review the full results of the NFDA Post-Lockdown Automotive Retail Survey [opens as PDF]
and NFDA Post-Lockdown Automotive Retail Survey – August [opens as web page].

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. 

Used car valuations

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.

A view from Philip Nothard, Insight and Strategy Director, Cox Automotive

"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."

The used car forecast

The Cox Automotive and Grant Thornton used car forecast model predicts 6.41m transactions by the end of 2020, down –19.2% on last year, and -13.0% from the 7.4m average across 2001-2019. Consumer activity eased in late October, and some retail groups were already limiting used vehicle purchases prior to the second lockdown in England. With a shortfall of more than one million transactions, it is clear 2020 presents a fundamental shift to the market. Three months of low to no trading could not be recovered before we entered this latest wave of local and national restrictions and lockdown.

Forecast of cumulative used car registrations - 2020

Looking ahead to 2021, the teams at Cox Automotive and Grant Thornton have forecast a mid-level figure of 6.64m transactions. Like the new car market, scenarios have also been outlined for a best and worst-case outcome, ranging from 6.41m to 7.08m. In the best-case scenario, the economic bounce back is immediate, unemployment is relatively low, consumer confidence is improving, inflation remains low, and vehicle supply is strong. In contrast, the worst-case scenario starts from the assumption that the impact of COVID-19 extends long into 2021, with low consumer confidence, a stuttering economic recovery, and an increase in unemployment.

Forecast of cumulative used car registrations - 2021

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. 

Used car transactions - three scenarios beyond 2021

Dealer predictions for 2021

In a Q3 Cox Automotive Dealer Sentiment Survey, two-thirds of dealers (64%) expected used car transactions to increase in 2021. Based on the demand in the latter half of 2020, particularly at the expense of public transport, this could be a logical assumption. There will also be some pent-up demand into 2021 from the latest lockdown. 

However, interestingly two thirds (36%) also expected supply to decrease. With reduced supply and increased transactions, it could be anticipated that values would rise and, indeed, almost a third (30%) of dealers expected trade values to increase in 2021.

Respondents also identified the impact of fleet companies running their fleets for longer and de-fleeting less frequently, a trend which was already biting in some sectors.  

"The problem is all the anti-car regulations and taxes. Used cars are not crippled as much and much more chance of finding a manual transmission, but there are ominous threats of retrospective regulations plus increased and invented taxes, even for cars that have already been manufactured."

Cox Automotive Dealer Sentiment Survey 2020

The US perspective

Coming to the end of October 2020, data from the US shows that used vehicle supply is close to normal levels, albeit lower than retail, and stable. After a strong recovery mid-year, used prices are now falling, although still around +10% higher than they were this time in 2019. In the final weeks of October, leads on were up year-on-year while also saw an increase in both new and used vehicle form submissions. However, Dealertrack’s unique credit applications continue to decline, suggestive of softening in the market.

The long-drawn-out Presidential election process has clearly been an additional complicating factor in the US market in the autumn.

In recent Cox Automotive US research, three in four dealers said they were now conducting some of their business beyond their dealerships, for example digital retail and service pick-up and delivery activities. The combination of anecdotal feedback and data suggests the auto market rebound that dealers were experiencing over the summer has stalled, with concern remaining high around COVID-19, political outcomes and the wider economy.

For more US market insights, visit Cox Auto Inc. Market Insights (opens in new window)

"Many of our vendors were already on a digital-first journey. The events of the past 12 months have accelerated the transition, providing an opportunity to test and imperative to trust the technology. Likewise, the 'forced adoption' of digital wholesale channels has flattened the adoption curve for buyers. The move to digital is creating efficiency gains on both sides. In all cases, people remain integral to success. Whatever the selling channel, customer experience is created and delivered through human interactions."

Pete Bell, Chief Operations Officer, Cox Automotive Europe