The value of a used car is a function of available supply and consumer demand – if one increases or decreases without the equivalent change in the other, then prices will respond to balance the market. Given that there are many factors that influence this balance, it’s at first glance surprising to see how well correlated measures of ‘confidence’, which should provide a good measure of demand, are against used car prices.
The chart below shows the quarterly trend in the ICAEW/Grant Thornton UK Business Confidence Monitor (BCM) since 2007 against an index of an unweighted average one-year/12,000 miles (Automotive Short Cycle Index, ASCI) and three-year/36,000 miles (Automotive Medium Cycle Index, AMCI) used car values.
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From the beginning of 2007 and through 2010 the indices are all remarkably well correlated, after which the AMCI value deviates sharply in 2011 before returning to trend in 2012. However, from 2013, used car values have changed little despite a strong rise in business (and consumer) confidence as shown by the BCM index.
However, these deviations are not particularly surprising when certain events are taken into account. First, during 2007-2008 new car production remained high despite falling confidence and demand. As such, used prices tumbled in response to heavy discounting in the new car market to shift the committed volume. Prices only began to recover in 2009 when OEMs reset their expectations, cut production and reduced discounts. Confidence then began to improve, and with it demand returned, further pushing up prices. However, economic uncertainty during the second half of 2010 both impacted confidence and used car values.
At the beginning of 2011, three-year-old values were seen to spike. As sentiment began to improve, and with it demand, supply suddenly became constrained – so few vehicles were registered three years prior without some form of incentive (scrappage etc, which tended to attract unnatural new car buyers who didn’t wish to change their car when it was only three years old) it became much more difficult to source a car of this age. As a consequence, vehicles of that age increased in value relative to trend.
It was also at this point that personal contract plans (PCPs) came into their own to drive private sales, with healthy discounts being given away "hidden" in clever finance structures. However, the nearly new market tends to do its homework and this, coupled with a faltering European economy and UK sentiment towards the end of 2011/early 2012, suppressed nearly new prices.
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By GlobalDataRising sentiment as a consequence of a better economic outlook from Q2 2012 allowed used values to recover slightly, although this is where the correlation ends. With so much volume now been pushed into the UK new car market, increases in demand have been met in full and so used prices have been somewhat stable on the whole. However, if the beginnings of a downward trend in confidence were to continue then, without a reduction in new car sales, used values must certainly fall.
Given that a reduction in new car sales is unlikely to be achieved just yet given European overcapacity, all eyes will be on the UK’s ability to sustain demand – and thus the trend in such a confidence measure.
Richard Parkin is director of valuations & analysis at Glass’s
