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Media hype adds to retail buyers uncertainty

The entire car retail market is in turmoil at the moment. New and used sales are not as strong as many had expected and everyone is looking for reasons.

Confusion over the twin plates? Oversupply of good retailable cars? They may be factors but the dominant reason is the uncertainty felt by the average retail punter, bombarded by stories of massive impending price cuts.

There are two mistaken assumptions doing the rounds in the media. One is that some manufacturers must respond now the public has rumbled their 'unjust' pricing policies in the UK compared with Europe. The other is that if they do make list price cuts of the magnitude being touted - up to 40% - then residuals will be devastated.

So people are staying away from the forecourt in their droves. These stories have been around for months and are now taking a serious toll on retail and, therefore, trade activity. I've lost count of the number of dealers telling me how people are saying “we're only looking - we'll wait until prices come down”.

Then there is the horror stories of overnight collapses in residual values in the event of such a realignment. This would not happen.

Let's assume there was a big list price reduction by several major manufacturers. The argument goes that used-car prices must reduce in proportion to cuts in list price. This is wrong on two counts.

First, almost nobody pays list price on a volume car, so the relationship with its residual cannot be so close. Second, the prices in the new and used markets are determined completely separately.

A new-car price is determined by a combination of factors: list price as a target value or the starting point of negotiations, what kind of margin the dealer is after and how other comparable models are priced.

A used car's value is determined entirely by what the customer will pay - what they consider the car to be worth to them. Nobody buying a used car considers its original list price in their calculations - it is simply irrelevant.

Take the car listed at £16,000 which can be bought for £14,000. If the list price is reduced to £14,000 the customer will simply not get the discount. And if his car is worth £6,000 and he would usually get £8,000 then he simply gets the real market value and the transaction price remains £8,000.

Where is the evidence that this new car then plummets in value by a further £2,000 simply because a figure on a sheet of paper changed?

But because of the fears this theory has sparked we are actually seeing residuals eroded. The irony is that even though list prices and used values are not tied as closely as many people assume, the mistaken belief that they are is taking people out of the market - which reduces used values.

If new and used car prices are absolutely tied together, how come residuals have been weakening even without movement on new?

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