Recent weeks have seen growing speculation that residual values are falling and that this reflects an underlying weakness in the marketplace. However, this decline falls into the area of seasonal variations, which does not necessarily mean that the underlying (or year-on-year) trend is downwards.
First, we can define what is meant by a seasonal variation. This is not the same as what can be referred to as the 'book drop' (the average movement between prices in consecutive editions of the Black Book). The reason is that the changes in Black Book prices are the result of a number of factors, not least whether the underlying trend in the market is for residuals to be rising or falling.
The seasonal factor is that element of the book drop that can only be attributed to the fact that we have moved, for example, from January to February. In seasonal analysis, it is important that this can be regarded as a fixed factor in each year.
The major reasons for these seasonal variations are clearly underlying changes in demand and supply, but the important point is that these value changes can be relied on to occur each year, regardless of other changes in market conditions. Clearly the book drop could be greater than the seasonal variation if the underlying market trend is downwards or reduced if the trend is upwards.
We can see that the residual value declines that are currently occurring in the used car market are within the normal seasonal movement. Residuals increase during the first quarter due to increased demand but fall throughout the rest of the year.
The decline is relatively small during the spring and summer, but accelerates following the September plate changes.
Clearly the three peaks can be attributed to the value of the year and letter changes. The conclusion is that residuals have stabilised for most vehicles. This can be confirmed by checking vehicle price indices such as the Cap Index. This shows that in June, the average value of used cars was up 2.4% year-on-year.