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RVs will not be damaged by reduction in new car list prices

One of the interesting features of the price realignment debate has been the continual repetition of one of the most fundamentally flawed assumptions made in the industry - that lower list prices automatically lead to reduced residuals.

This fallacy has even been used by some to suggest that the much touted realignment of UK list prices with those in Europe would be damaging to existing car owners, who would suddenly find they had lost a chunk of their own vehicle's trade-in value overnight.

Quite where the evidence for this assumption comes from, however, is a mystery to me. To argue this is to ignore the lessons of history.

First of all, the suggestion that lower list prices would lead to lower used car values means you have to assume that more expensive list prices lead to higher residuals. This is not the case.

The used car buyer's budget - particularly in the fleet/four-year-old market - is dictated by what they can afford. It is not influenced by how much the car cost new. How many customers buying a used car ask what the original list price was?

There have also been many examples in the past where new cars have been devalued, in some cases quite significantly, with no accompanying collapse in residual values. Probably the best example of this was in 1992 when special car tax was abolished. Working out around 10% on top of list, this was a significant reduction.

Had the assumption that this would lead to a 10% reduction in residuals been followed, anyone writing future residuals at the time for 1995/96 would have been well out. When we look at the Cap indices for that time we see that car prices were actually rising quite strongly.

Another famous example followed in late 1993 when Ford 'realigned' the price of the recently introduced Mondeo by around £1,000. I have yet to find anybody who is prepared to pay more for a 1993 Mondeo compared to a 1994 model, despite it having cost significantly more.

It is important that everyone gets to grips with the flawed residuals argument, however, because it does damage the market. The danger then is that everyone steers clear of buying used examples of the car in question for fear of holding rapidly devaluing stock and - hey presto - the original argument suddenly appears to be proven as the residual does indeed plummet.

The only time a new price is compared with a used value is in the process of deciding whether or not to buy new or second hand in the first place. Once the decision to buy used has been made, the original value becomes irrelevant and all that matters is what the item is worth to you, today.

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