Used-car prices up but rising supply to limit gains: Global Auto Report

Scotiabank’s Global Auto Report for Oct. 10 says Canadian used car prices picked up in early October alongside the recent expiry of enhanced incentives on several new vehicles and will remain strong in coming months due to ongoing tight supplies of used models.

However, after several years of fewer vehicles coming off-lease inCanada, some loosening will begin in 2014, as the new vehicle sales recovery finally increases the supply of used models for the first time since 2009.

Nevertheless, Carlos Gomes, editor of the Scotiabank Global Auto Report, said “We estimate the supply response will be modest, and lease returns will remain well below pre-recession levels for an extended period.”

Incentives on new cars and light trucks surged during the summer in Canada, reducing new vehicle prices by five per cent since the opening months of 2013.

According to Statistics Canada, after adjusting for quality and increased new vehicle content, prices are currently seven per cent lower than in the summer of 2007 — prior to the global economic downturn.

In contrast, used car prices in Canada had been advancing steadily since the global economic expansion began in mid-2009. As of early 2013, the Scotiabank Used Car Price Index was eight per cent higher than in early 2007.

Four-year old models led the way, with prices exceeding pre-recession levels by nearly 20 per cent. However, Canadian used car prices began to soften during the spring as automakers enhanced new vehicle incentives.

As of August, the Scotiabank Used Car Price Index was down 2.9 per cent year-over-year, before beginning to firm over the past month.

The recent improvement in used vehicle prices has been broad-based. But similar to the experience of recent years, older models have posted the largest appreciation from the summer lows.

Prices for four-year old cars advanced 2.5 per cent y/y in October compared to a flat performance for overall used car prices and a two per cent y/y slide for one-year old models.

Gomes said “the larger gain of four-year old models reflects two supportive trends: a greater shortage of late-model vehicles due to a sharp reduction in fleet and lease volumes since the Great Recession; the fact that older cars are less impacted than one- and two- year old models by enhanced new vehicle incentives.”

The shortage of older models reflects the plunge in fleet and leasing volumes to an average of only 350,000 units in Canada during 2009-2010 — less than half the level of the previous decade.

Even as fleet and lease volumes have improved in recent years, climbing to 577,000 in 2012, off-lease activity has continued to decline and is currently 30 per cent below what was normal prior to the Great Recession.

These trends have helped reduce the number of four-year old vehicles on Canadian roads to an estimated 6.5 per cent of the fleet — the lowest level in a decade.

A major North American auto financing company indicates that this shortage is prompting lessees to buy the vehicles they leased in 2009-2010, instead of returning them to automakers to be remarketed.

The company points out that while its overall lease returns have recently started to edge higher, returns for vehicles 39 months or older continue to decline and now account for only 13 per cent of the companies returning vehicles, down from more than 40% in 2011.

The declining supply used models in recent years has also led rental car companies to alter the mix of their fleet holdings.

In a quarterly filing, one of the largest rental car companies in North America indicates that program cars — those that are leased and returned to the manufacturer once the lease expires — now account for less than 20 per cent of its fleet, down from 55 per cent as recently as 2010.

While the company indicates its decision to purchase or lease new vehicles is dependant on the overall vehicle pricing environment, the decision by rental car companies to purchase most of their fleetand increase the average vehicle holding period will hold back the near-term increase in the number of remarketed vehicles.

A shortage of used cars and light trucks is also being felt in the United States. As a result, the number of used vehicles imported into Canada from the United States has also dropped sharply.

The Registrar of Imported Vehicles reports that imports of used vehicles have slumped by 25 per cent so far this year, falling to the lowest level in nearly a decade.

At the end of September, used imports had plunged 40 per cent below the January to September average of the previous five years.