Fleet News

Looking ahead in the RV lottery

FORECASTING residual values is as demanding as predicting next week's lottery numbers. But, argues Mike McRae, operations director at Velo, there are some clear indicators of what lies ahead for used car values.

'No-one can deny that the UK's used car market has suffered over recent years. There is no single defining factor that was responsible for the fall in prices. It was a combination of several issues that resulted in a deflationary impact on new and used car prices.

##MikeMcRae--right## Beginning in the mid to late- 1990s, the insatiable 'Rip-off Britain' campaign was fostered by the rapid rise in UK currency exchange rates and also by the Government's aggressive competition policy. Led by the Consumers' Association, high value commodities, especially cars, were held up to illustrate massive price disparities between Britain and the rest of the EU.

During this period, I noticed that private buyers became unwilling to enter the UK car market as the media continued to report that new car prices could drop by 20 – 30%, so they matched European pre-tax levels.

The propaganda was plausible although unrealistic, yet it had a strong negative impact on the new and used car markets. Buyer confidence slumped and sales followed suit, creating a deflationary trend in used car prices.

When the Competition Commission finally presented a report of its findings in August 2000, it suggested that new car prices in the UK should actually drop by 10 – 12%. During the autumn of the same year, volume car manufacturers reduced prices on average by about 6%.

Once new car prices were reduced and confidence returned, the used car market quickly stabilised. In fact, within six months, residual values were rising for the first time since 1988.

At a recent Velo business seminar, Ramesh Notra, economics editor at CAP, commented that 'the trend now is for residual values to continue rising – they are expected to increase by a further 1% in 2003'. This certainly seems a reasonable prediction to me. Just like CAP, Velo continues to assess market trends and re-marketing strategies and in spite of the apparent recovery in the used car market, I believe new challenges lie ahead.

The Alliance and Leicester's monthly car price indices have shown UK new car prices have fallen month-on-month for the past two years, a trend that has led to a boom in car sales.

The new car market in the UK is now one of the most buoyant in Europe and prices are continuing to fall. Leading industry figures are now warning today's booming new car market could result in bust for residual values in three years' time.

I believe this situation could be most acute for diesel vehicles. The fleet shift towards diesel, (which took up about 22% of new car sales in 2002), is likely to result in the traditional premium for diesels subsiding.

Sellers of used diesels may find that whereas before they would sell for a 10 – 12% premium over petrol models, this figure could fall to about 5% initially, with engines using dated technology being the worst affected. The hope is that active marketing from manufacturers for diesel will help increase used demand.

While purchasing habits are changing as a result of legislative change and improvements in technology, another shift in market trends is for a move away from traditional fleet suppliers towards prestige brands.

Critical to the prestige image is its ability to maintain its exclusivity, yet many premium brand manufacturers are developing products for a much wider market, eroding the very same exclusivity that sets them apart.

Car park one-upmanship means many company car drivers would rather opt for an entry-level prestige model than a car with a superior specification from a high volume manufacturer.

The fall-out will be when these cars enter the used market. Purchasing trends of used car buyers differ, which in turn could have an adverse effect on the resale value of prestige brands.

It is important to choose the right vehicle. Some vehicles continue to hold their value well when others suffer. There are many factors that can be taken into account when choosing a new car to help reduce the risk. For example, it is important to specify the car correctly and choose extras that suit the vehicle. But although there is the possibility that the used car market may again lose value, prudent buying and sensible maintenance can eliminate most of the risk.'

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