Car Editorial - July 2010

Having gone through the dramatic falls in used car prices in 2008 to be followed by an even more dramatic rise in 2009, this year was expected to see a pattern of price changes more typical of the earlier years. That is to say, an increase in the early spring, a decline during the summer months, a brief recovery in early autumn before a more marked drop in the final quarter.

To what extent has this happened so far this year?

The first column in the following chart shows the month-on-month changes in auction prices between January and May, expressed as an average of the last five years. The third column shows the month-on-month changes for 2010.

Month-on-month changes in auction prices for 3 year old cars from the supermini, lower and upper medium sectors (Jan – May)

Average month-on-month changes for the last 5 years	Month	Average month-on-month changes in 2010
2.3%	January	1.9%
2.8%	February	2.2%
0.5%	March	2.5%
-1.0%	April	-1.2%
-2.6%	May	-3.6%

The first point to make is that the general direction in prices this year is the same as the five year average. In other words, in each of the first three months, prices have increased from one month to the next, and in the following two months prices have fallen. The second fact is that prices were slower to recover in January and February, but when the recovery came in March it was more marked than the five year average. The most likely explanation of this is that the bad weather from the end of December to the middle of January had the effect of reducing sales by at least 25% over this period. This, in turn, delayed trade buying activity and the associated competition for stock that stimulates prices.

During the second quarter, prices have been falling at a slightly more accelerated rate compared to the previous five year average. The reason for this is largely the result of the bumper registration month in March generating a correspondingly high number of part-exchanges that suddenly became available to the market. In the interests of accuracy we should exclude the Scrappage registrations from the March total because Scrappage deals only produce cars for the dismantlers. However, even allowing for this qualifying statement, new sales – and therefore part-exchanges – were still more than 10% higher than March 2009. On the other side of the equation, used retail sales were several percentage points lower than a year ago. The inevitable consequence of more supply and less demand is a fall in prices and, more importantly, the extent of the movement has been a little more severe because the elements of supply and demand are a little more out of kilter compared to the average of the last five years.

So what is likely to happen next?

What is noteworthy is that the sum of the year-to-date adjustments in 2010 is very similar to the overall adjustments of the last five years. So a good starting point for our short term forecasts would be to look at the adjustments that took place over the last five years for the remaining months of those years. See below.

Month-on-month changes in auction prices for 3 year old cars from the supermini, lower and upper medium sectors (Jun – Dec)

Average month-on-month changes for the last 5 years	Month
-3.3%	June
-1.1%	July
-0.4%	August
1.6%	September
-3.3%	October
-4.3%	November
-1.9%	December

As we can see, June is historically the most challenging month until we move to the final quarter with prices typically falling 3.3% from May. The latest price data we have at the time of going to press is that prices for the first three weeks of June have fallen a further 2% which means that we are close to the average June reduction of 3.3%. What is true of this time of the year is that the wholesale market is still trying to absorb the influx of part-exchanges from the March plate change. This activity is often protracted because retail sales are in decline, and therefore the appetite from the trade to buy them also subsides.

What is also apparent from recent trends in retail sales is that customers’ propensity to buy is only being further discouraged by what is happening in the economy. This is before we see the possible fallout from the government austerity measures that will merely serve to reduce disposable incomes for all of us.

We should also remember that the main reason for the price increases in 2009 was a widespread shortage of used cars at a time when used car retail sales were still falling, and clearly, the former was a more dominant factor than the latter. By the early part of 2010 it was believed that the price ‘correction’ was complete, and the fact that the first five months have moved in line with the historic average would tend to support this.

Even though we still have an underlying and ongoing shortage of used cars by virtue of low new car registrations and low numbers of part-exchanges, the market is still going to be subject to short term events outside of the norm. This suggests that demand, reflected by lackluster retail sales, will still edge back in the second half of 2010 relative to last year. The other side of the coin is the trade supply, and it is thought that this will, at least, be sufficient taking account of the reducing car parc for younger cars. This does not preclude the distinct possibility that there will be ‘pockets’ of shortages in the niche sectors and for some late used cars from specific manufacturers.

The best case scenario would match the sum of the monthly changes over the past 5 years. Translated, this means that a car with a trade price of £10,000 on 30th June would be worth £9,100 at the end of December having covered another 6,000 miles. However, the balance of probabilities would suggest a figure a little under £9,000.