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Insight: Valuations key to success

The first two months of 2005 have seen a steady rather than exceptional start to the used car market, particularly when compared with the last three years’ strong new and used car sales.

The past eight months have seen mixed economic messages with most commentators agreeing that the housing market is slowing – together with uncertainty about interest rates. This is often the main factor in determining how much cash private buyers can free up to fund the purchase of their next used car, although it can also work in reverse by forcing buyers to consider nearly new cars instead of used.

With the UK leading Europe in terms of credit debt, which has attracted lots of exposure in the media, the industry could see a slow down in motor finance deals, and that could affect the market. However, despite economic pressures, the consumer is still key to the industry.

Stimulating business

“When motorists need a car they’ll go out and get it. Despite what anyone might think, the private buyer is the market driving force,” says Tom Madden, BCA’s director of customer affairs.

“We may see some deferment of purchases at the more frivolous end – the fun cars, the third family car – but private motorists will still be buying used cars and looking for the best deals.” Madden believes used car activity is going to be stronger than new in 2005, which means used cars will be an even more dominant profit driver for dealers.

“Expect to see manufacturers and dealers stimulating business with excellent retail deals on new and used cars,” says Madden. “Anything to stimulate footfall into the retail dealerships will be good news and we can expect to see some big marketing initiatives throughout the year.”

Dealers will need to be aware of real-world prices in their local market area, rather than totally relying on the pricing guides when purchasing part-exchange vehicles. The big question they will be asking is “what is it really worth?”.

Larger cars may find values squeezed, as the used buyer is wary of any models that have high running costs: upper executive and large 4x4 markets will no doubt feel this first. In contrast, mini-MPVs, smaller 4x4s, lower-medium and superminis will remain very desirable and diesel will continue to take a premium.

“We just don’t see used diesel values coming under any pressure in the short to medium terms and would always expect diesel to outperform the petrol equivalent in terms of price,” says Madden.

Budget outperforms

“The budget part of the auction market, £1,000 to £2,000, is very strong and these cheaper, older and higher mileage cars are as likely to outperform the guides as any sector. This is something for dealers to bear in mind when taking in part exchanges.”

Madden believes another area to watch is the plethora of new models entering the market this year. This does not necessarily mean used values on the outgoing model will be depressed. What is more likely to affect used prices is heavy discounting on the run-out models, which will inevitably influence values in the nearly new market.

“Generally, 2005 looks to be set fair for the used car market,” he says. “Dealers are going to find a lot of competition in the prime three-to-five-year-old market, so knowing exactly what their stock is worth is going to be absolutely vital this year.”

In the first two months of 2005, prices have been consistently strong for 02 and 03 plated cars coming back into the market. Volumes are slightly down, which means there are strong bids for those cars in good condition and with average mileage.

Rob Barr, group marketing and planning director for Manheim Europe, says dealers and carmakers are increasingly refurbishing cars to ensure they stand out from the crowd when they go under the hammer.

Barr adds: “A ready to retail car often attracts more bids and higher prices, with used car buyers happy to pay a premium for a car that can go straight on to their forecourt.”

He believes the used car market will retain its stability in 2005, with sales of diesels being particularly strong.

“As more diesel cars come through the used market, we don’t envisage the predicted huge fall in residuals anticipated by many. Instead the best quality cars will continue to attract strong bids with prices falling marginally across the year, rather than in one big drop.”

With even Euro IV diesel engines incurring a 3% benefit-in-kind company car driver tax surcharge as of January 2006, Barr believes fewer diesels will be sold into the fleet sector. The reduced volume should mean diesel residuals remain constant in the future, bringing further stability.

This year will also see the use of technology in the auction house increase as sellers reach out to a wider audience online.

“Technology is continuing to offer vendors and buyers a new route to selling and buying, and vendors who choose not to use technology such as the Manheim Simulcast interactive auction could potentially miss out on more bids and higher prices,” says Barr.

“Online auctions will never replace physical auctions in our lifetime, but they provide an additional approach to maximising residual values for vendors and a practical purchasing route for busy buyers who can’t always travel to a physical auction.”

Ongoing slide

Second hand cars have reached historic levels of affordability with the typical used car now costing below a fifth of the average annual gross wage.

The research, carried out by used car market analyst CAP, demonstrates the impact of an ongoing slide in used car value against income for the used car sector.

CAP says this is caused by new car oversupply piling downward pressure on residual values, despite the ongoing improvements in quality and performance of all cars. Good news for buyers, in some respects – for retailers it comes back to accurately valuing part-exchange cars when they return to the dealership to ensure they are sold on quickly and profitably.

“There are a lot of cars out there, but despite salaries increasing, the amount spent on used cars is not. Instead, consumers are using the money to pay off their mortgages or go on holiday,” says Mark Norman, managing editor of CAP Monitor, CAP’s forecasting division.

“The general movement in used cars values is downward in relation to average wages. One reason is oversupply, which opens the door to intense price-led competition. Another is the reliability and quality of the cars themselves.”

Norman says that as cars can be run for longer before mechanical or bodywork problems set in, a consumer’s decision to replace their car is related more closely to desire than a practical need. This can push a replacement car down the list of spending priorities.

This is illustrated by the difference in value between a three-year old Ford Escort and the vastly superior Focus. In 1997 a 1994 L-registration Escort 1.6 LX, with 60,000 miles was valued in the trade at £4,700.

Now, a three-year old equivalent Focus is valued at £4,300, which is a fall from 27% to 18.5% in relation to the annual gross average wage. The analysis shows that, for the first time, the typical three-year-old used car costs less than 20% of the average UK gross wage.

“Overall the used car market shares increasingly similar pricing characteristics with so called ‘white goods’ and consumer electronics sector, where increased performance, speculation and quality are accompanied by ever greater levels of affordability,” adds Norman.

Return of confidence

While the tail end of last year saw rates of used car depreciation continue to increase, the usual seasonal uplift in residual values during January was less pronounced than during the same month in 2004, according to Glass’s. The car valuation and market intelligence specialist also believes values for most ages and types of used car will continue to weaken, but at a modestly increased rate over the rest of the year.

“With general inflation well under control it is quite likely that current interest rates have reached their peak,” says Alan Cole, editorial consultant at Glass’s.

“Once consumers become accustomed to this, buying confidence will return, although at a level lower than during 2004. The 2005 market will not, however, benefit from property equity releases to the same extent, with house price inflation likely to remain at a more subdued level. The net result should be a continued softening of used car values across most sectors.”

According to Glass’s latest quarterly used car market index, the typical used car lost £233 in its trade value from October to December 2004, a fall of 3.2%. This reflects a modest weakening of values, which can be attributed to falls in consumer demand and increases in used car availability.

“The market may have reached a plateau by the end of this month,” says Glass’s managing editor, Adrian Rushmore. “This situation is more than probable given that retail demand this year is not expected to be any better than 2004 and that there will be at least as many used cars in circulation across the trade.”

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