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Insight: Used car market - extended analysis

The most commonly cited reason for rising values in the current used market has been the ‘shortage’ of stock. This, however, risks oversimplifying the issue. 

Research at CAP suggests that the reality is a change in the pattern of both supply and demand.

The market in recent months has certainly been very different from what has become the ‘norm’ in recent years.

And some of this appears on the face of it to be counter-intuitive.

For example, we are seeing robust and rising trade values co-existing with a measurable decline in used car retail sales.

Furthermore, because so many dealers have been reporting difficulties in obtaining trade stock up to one year old in particular, there is now a widespread assumption that later plate cars have been in short supply for much of 2009.

Of course, because new car production has been substantially reduced and new registrations have been typically running around 25% lower than during the comparable months a year previously, there is some truth in this.

But it does not tell the entire story.

Therefore it may come as news to some that during some of the months this year when dealers and trade commentators have been lamenting the shortage of late cars there were actually substantially more of them offered for sale in the open market than a year previously when the common complaint was of ‘oversupply’.

Because the claims of stock shortages tend to come from dealers on the auction block this analysis focuses on a like-for-like comparison of supply running through the auctions in 2009 compared with the same months in 2008.

Like-for-like means that only those suppliers of raw disposals data to CAP who contributed figures during both periods have been included in the analysis.

This prevents distortion caused by either new contributors of raw disposals information or reductions in figures caused by those that may not have supplied the same information year on year.

It should be noted that this (as shown in the accompanying chart) does not represent all disposals data received by CAP for the period – only that from sources which can be safely compared over the two time periods.

Analysis of raw disposals figures at auction reveals that the proportion of cars up to one year old going into auction was 9.4% of the total up to the end of June this year.

This represents 39,120 units.

During the same period last year there were 31,601 cars up to one year, which represented 7.6%. 

Despite the claims of later plate stock shortage, these figures show that there has been a significant increase in supply of one year old cars at auction this year.

Turning to cars aged 2 – 3 years last year’s figure for the first 6 months was 51,154, which was 12.3% of the total.

This year the figure is 57,635, or 13.9% of the total.

Therefore, for cars in both age segments, this year has seen an increase in supply through auction. 

Research has consistently revealed a decline in retail demand at dealerships during the past few months and this is where this year’s market throws up apparently counter-intuitive facts.

How is it that a trade market which is usually characterised by almost constant asset depreciation in almost every month during a ‘normal’ year is now seeing values rise again and again in the face of reductions in retail demand?

The answer lies in the shift in market dynamics. In short, we have moved from a supply-led to a demand-led market.

Under typical circumstances more new cars are produced and registered than either business or the retail public actually needs.

CAP’s estimate is that up to half a million surplus units are made available in this way each year.

The ways in which this oversupply is normally filtered into the market are well known but it is that surplus which is now absent.

The temptation is therefore to attribute this year’s rise in trade values to a market that is now undersupplied.

This is an oversimplification.

The bulk of additional demand at auction is believed to be from franchise dealers whose normal contact with the auctions would often be limited to trading out of stock which does not fit their profile and which they cannot get underwritten.

They have been forced out into the open market due to the slump in new car sales and the consequent lack of part-exchange units coming in.

2008

Plate Age   Total Sales   %
2-3   51,154   12.3%
1-2   41,340   10.0%
0-1   31,601   7.6%
Total   415,219    
 

2009

Plate Age   Total Sales   %
2-3   57,635   13.9%
1-2   52,570   12.7%
0-1   39,120   9.4%
Total   451,501    

Chart: Like for like sample of raw disposals showing proportion of cars disposed through auction from 1 to 3 years old January – June 2008 v January – June 2009

In short, we have seen a change – at least for the time being – from a supply-led to a demand-led market. This rebalancing of the market shows no sign of altering in the immediate future. 

Car production has also been reduced, which means less physical availability of cars to turn into late used stock.

Many manufacturers have also pulled away from short-cycle business, such as daily rental, which has further reduced availability to dealers who might otherwise have taken such stock immediately back to retail out again.

At the time of writing (August 4) CAP’s research suggests that the supply of stock into the open market is due to reduce further in the next few weeks. This means there is no sign of the dynamic changing any time soon, unless retail demand undergoes a sudden and severe reduction.

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