Used-car prices take sharp fall, but bright spots remain in wholesale market

MARKHAM, Ontario – 

After the largest monthly decrease in its 15-year history, the Canadian Black Book vehicle value retention index continued its descent in May, pushed by declining consumer confidence and auto-market uncertainty.

And both wholesale and retail vehicle values are likely to continue falling.

That’s according to the latest COVID-19 Market Update from Canadian Black Book, released earlier this week.

But the report wasn’t all doom and gloom. Auction volumes are steadily picking backing up, for example.

Zeroing in on the retention index first, CBB said wholesale prices fell 3.20% last month. In April, they had dropped 3.58%, a record.

The total decrease from February is now at 7.76%.

“The decrease was driven by the collapse in consumer confidence, along with high levels of uncertainty about the current vehicle market due to the pandemic,” CBB said in the report.

And the price softness is expected to last for some time. Mirroring an environment, it said is a “new economic reality,” CBB said that “projected values will continue to stay well below pre-COVID-19 projections over the next two years.”

In the near term, CBB is forecasting that the rest of 2020 will see wholesale prices down an average of 17% from pre-COVID projections. This summer is likely to show a “larger difference,” CBB said, followed by a recovery likely to begin next year,

“We also anticipate that older (more than 6-years-old), less expensive vehicles in average condition will not decline as much due to increased demand for these units,” it said.

“The demand lift is expected to be driven by consumers seeking low cost reliable transportation. COVID-19 and social distancing practice is also expected to cause some regular transit riders and ride sharing customers transition to vehicle ownership,” CBB said.

Delving into some supply metrics that are likely to impact used-car values, CBB is forecasting a “large incremental influx” of supply in the second half of 2020. 

“These units will flood the market from deferred lease returns, downsizing of rental fleets (including the expected sell-off of a large number of Hertz’s units), increased repossessions, and a backlog of un-sold inventory from the March-May time period,” CBB said.  

“As a result, we maintain our projection that there will be a continued decline in wholesale prices over the next several months, with some improvement expected by winter.”

Looking further ahead, the company projects that even in 2023, the aftermath of COVID-19 will still be in play. But it anticipates pre-pandemic residual values by then, due to declines in used-car supply. That expected supply softening is driven by forecasted declines in retail and fleet sales “the remainder of 2020 and into 2021,” CBB said.

In its report, CBB also outlined what the impact to wholesale prices would be under a severe recession.

“In this scenario, we project a 25% drop in wholesale prices compared to a pre-COVID-19 baseline this summer/ fall, with a very slow recovery in 2021,” CBB said. “The effects of the pandemic and recession will still be impactful in 36 months, and we project a 10% market level decline of wholesale prices as compared to pre-COVID-19 projections for the second half of 2023.”

Amid these somewhat troubling projections on the pricing front, there were some silver linings in CBB’s report, including what it observed in auction activity and volume.

For instance, CBB noted that digital auctions across Canada “continue to show signs of returning to a more normal state. Prices are stabilizing, bidding and buying activity has increased, and auction personnel are returning.”

Auction volumes are also bouncing back, which has helped to stabilize prices, CBB said.

“This increase in volume appears to be leading to greater stability in prices. Previously, the throughput of wholesale auctions was limited by the closure of all physical auctions and the temporary reduction in staff by the auctions,” it noted. “Sales have yet to return to prior year levels, but that is expected to be the norm over the coming months. The number of sales bottomed out around an 80% year-over-year decline when most auctions closed their physical sales in March.”

What’s more, after hitting percentages in the teens at the outset of the pandemic and the stopping of physical auction operations, there has been a gradual, week-by-week increase in sales rates at auctions, albeit “with some instability along the way,” CBB sad.

“Last week, we observed sales rates continuing to climb as buyers appear to be getting more comfortable with the virtual bidding environment they are operating in,” CBB reported. “When more prospective buyers can return and walk the lot in advance of the sales, we expect this will boost confidence in bidding and elevate sales rates. We will continue a steady march towards historically ‘normal’ sale rates in the coming months.”  

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