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Market dictates the importance of size

Nothing illustrates the difference between the new and used car markets better than the perception of engine capacity by the customer. As the current Clio ad states, size certainly does matter – but the way in which it matters is different depending on the market.

The new car market is driven primarily by the corporate sector – cars chosen by people who neither pay for the car nor its running costs. In this market bigger is always seen as better and, because there is no strong disincentive to choosing a large engine, many drivers will simply pick the most powerful option they are given.

However, most used car buyers do not have speed and performance at the top of their shopping list. Instead they are looking for economy and the lowest possible day-to-day running costs.

Where the company car driver will jump into a 2.5-litre family saloon, with an insurance group of 12 or more, low fuel consumption and high service costs, the private buyer is more likely to look for a car in a lower insurance group, with fuel consumption in the mid-to-high 30s and reasonable service costs.

Yet, because the larger, more powerful engine costs more new, there is the assumption that this premium will carry over into the used market. This is not true. Last month's column explained why used values bear no relation to new prices.

In addition, we have recently seen some cheap retail deals on cars like the 2.5-litre Vectra, increasing their popularity with company car drivers.

If the numbers involved are kept reasonably low it is not too much of a problem. If they remain sufficiently scarce it may be possible that a small premium can be maintained. But when that balance is broken and more of these cars hit the market the rarity factor disappears.

Then market forces play a bigger role in the residual value. In some cases retailers would have difficulty in justifying any premium at all. Even if they are offered at the same price, the smaller engined model is likely to sell more quickly.

This point is heightened when you look at diesels. Nobody buys a diesel for the pleasure of sitting in a slower, noisier, smellier vehicle. People pay a premium on diesels for the improved economy.

Also, performance is playing less of a role in the purchase decision of the typical car buyer as the modern motoring environment features speed cameras, roadworks and traffic congestion. This is particularly true of the used car driver, who is more likely to be urban-based.

Insurance costs are another factor which should never be underestimated. While a difference of two or three groups may not matter so much to the corporate driver it can make a difference of several hundred pounds to the private customer.

Some manufacturers will charge several thousand pounds more for the performance engine in a new car. But if current trends continue I believe the likelihood is that we will see something approaching uniformity in model values, regardless of engine size, in the used market. For that reason, continuation of the almost traditional practice of setting higher residual values for larger engined models cannot be assumed.

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