Fleet News

Guest opinion: 2005: a great year for model launches

THE average value for a three-year-old car in December 2004 was £6,175, some £485 lower than at the same point in 2003.

Does this fairly dramatic fall in values signal more doom and gloom for the market over the coming months?

When considering the trading patterns of last year, it would be easy to say the market had been difficult for both trade vendors and retail dealers.

However, we would prefer to say that the previous year was an exceptionally good year when measured against any other year since the turn of the century.

The impetus for this activity was due to the newly-found spending power of consumers, thanks largely to interest rates of under 4% and annual house price inflation running at 24%. Prospective used car buyers had never had it so good. Therefore, it is not surprising that this level of spending was unsustainable given a series of interest rate increases and a curtailing of house price inflation.

During 2004, the used car market simply adjusted to the reduced level of demand and lower prices were a direct consequence of this.

Economists would describe the current macro-economic climate as benign. Using interest rates as an instrument of control, the Bank of England has been successful in keeping general inflation well below target and house price inflation subdued.

It is therefore very likely that interest rates have reached a peak and, once consumers believe this, buying confidence will return, albeit at a lower level than last year. So the propensity to buy used cars may only be slightly smaller than we saw in the last six months of 2004.

To make any assessment on prices, we also need to look at the supply side of the equation and there are two negative aspects to this during 2005. Firstly, the industry forecasters are predicting a slight contraction in the new car market, which is probably in the order of between 100,000 and 150,000 units.

If we accept that manufacturers will not budget for this downturn, many of these additional units will enter the used market as three and four-month-old cars.

Secondly, we have the legacy of rising new car registrations in recent years. The car parc for three-year-old cars will increase again this year by around 80,000 units.

This age of car is critical for the market because the change of first ownership takes place at around 40 months. Neither should we ignore the fact that the parc for one and two-year-old cars will increase. However, the impact on the market is smaller because they remain outside the normal replacement cycle.

It is important to note that this additional supply must find retail buyers because trade vendors have no option but to sell these depreciating assets as quickly as possible. Because we believe that the natural retail demand will be slightly less, more buyers will only be found on the basis of lower prices. It is for this reason that residual values will continue to fall during 2005, but not to the same degree that we witnessed last year.

Additional influences on the car market for 2005 include new car prices. In the past three years, prices have increased by a fairly modest 5.7% but this disguises the fact that the increases in the past 12 months have been as high as 3.1%.

Further inflationary pressures have been apparent and take the form of escalating fuel and energy prices, together with the rising cost of steel.

Manufacturers’ margins are somewhere between wafer-thin and non-existent, so it will be unlikely that these costs can be absorbed. Rising new car prices will relieve some of the pressure on used values, particularly on late used, but the positive effect will be slow and gradual.

This year will also be a bumper time for new model launches. We calculate that the number of new model ranges will go up from 49 to 76, representing a massive 55% increase in launch activity.

Next year is also predicted to be a similarly busy year. While this will help stimulate interest and demand, there is also the potential danger that existing model lines might experience a shorter life cycle. If we see a shorter pattern of new car life cycles, the same effect will be translated in the used car market. However, this may not be clearly discernible in 2005.

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