Monthly Market Update: Residual values enter 2023 immune to cost-of-living crisis
04 January 2023
The sales-volume index of used cars gained month on month across European markets in December, except for Italy and the UK. Furthermore, residual values (RVs) ended 2022 with a final push upwards, except for a negligible downward adjustment in Switzerland.
Used-car prices continue to outpace list-price developments. Accordingly, RVs of three-year-old used cars, represented as a retained percentage of their original list price (%RV), either held firm or gained in December, except in the UK. The month-on-month deviations were all in a narrow range of -0.6% in the UK to 0.8% in France. Year on year, there were double-digit gains except for the 6.9% growth in France and the 2.5% decline in the UK.
New-car registrations in Europe enjoyed their fourth consecutive month of year-on-year growth in November. The 17.4% gain surpassed the 14.1% growth recorded in October, even against a higher base of comparison. These figures confirm the ongoing recovery of new-car supply, which has been constrained by semiconductor shortages as well as additional challenges caused by the war in Ukraine and COVID-19 lockdowns in China.
Although the cost-of-living crisis will reduce order intake, Europe’s new-car market will continue to rely heavily on fulfilling orders placed even before energy costs and inflation started to rise in 2022. However, semiconductor shortages are unlikely to disappear in 2023 and with higher deliveries than previously expected in 2022, Autovista24 has lowered its 2023 forecast by 50,000 units. At 12.79 million new-car registrations, this represents 14.3% growth compared to the latest assumption for 2022.
The cost-of-living crisis will invariably erode consumer demand for used cars, which would ordinarily put pressure on RVs. However, in addition to new-car supply challenges, the COVID-19 pandemic significantly derailed the European new-car market from March 2020 onwards. This will acutely reduce the volume of cars de-fleeting after three years.
So, undersupply into the used-car market is expected to persist, granting RVs a level of immunity to diminishing demand stemming from the cost-of-living crisis. Accordingly, Autovista Group forecasts that the %RV will only decline modestly, if not improve, across European markets in 2023 and 2024.
The interactive monthly market dashboard examines Austria, France, Germany, Italy, Spain, Switzerland, and the UK. It includes a breakdown of key performance indicators by fuel type, including RVs, new-car list prices, selling days, sales-volume and active market-volume indices.
Scenario analysis
There are upsides and downsides to this base-case scenario.
Used-car prices will come under greater pressure if the economic situation deteriorates in Europe, with a greater negative impact on demand. This would be compounded if there are significant supply improvements. For example, lower demand for consumer electronics could see a quicker resolution to the semiconductor shortages in the automotive industry. According to VNC Automotive, the ‘semiconductor drought could soon become a flood of chips.’
Conversely, there are risks of greater disruption to new-car supply, which would benefit used-car prices. Automotive suppliers could succumb to mounting costs and economic headwinds. The risk of the war in Ukraine escalating remains too, with potential consequences for Europe’s fragile supply chains. Any unforeseen improvement in used-car demand, either if fewer new models can be delivered or consumers defect to buying used instead of new, would also push RVs higher.
Slight decreasing trend in Austria
Living costs are rising in Austria and used-car transactions have slowed compared to the first half of 2022. The sales-volume index clearly shows weakening demand with a decline of 12.7% compared to December 2021.
However, the supply of passenger cars aged two-to-four years in December was 3.9% higher than a month earlier and 13.1% higher than December 2021. Average days to sell increased to an average of 71.7 days. This development also confirms the slowdown of used-car demand.
Battery-electric vehicles (BEVs) are currently selling the fastest, averaging 57.8 days, followed by hybrid-electric vehicles (HEVs) with 66.2 days, petrol cars with 70.2 days and diesel cars with 71.3 days. Plug-in hybrids (PHEVs) are selling the slowest, averaging around 90 days.
Despite weakening demand and improving supply, RVs of 36-month-old cars have increased slightly. The average %RV grew by 0.7% month on month in December with cars retaining 55.2% of their list price on average. This marked a solid 17.8% year-on-year gain. HEVs are currently leading with a trade value of 57.1% of the original list price, followed by PHEVs (56.4%), diesel cars (55.5%), and petrol cars (54.9%). 36-month-old BEVs retain the lowest value, at 54.1% of list price.
As demand is likely to weaken while supply recovers, pressure on RVs is to be expected. Nevertheless, with only a slightly decreasing trend, RVs of three-year-old used cars will remain relatively high.
Robert Madas, Eurotax (part of Autovista Group) regional head of valuations, Austria, Switzerland, and Poland, forecasts that the %RV will end this year 2% down on December 2022. For 2024, he expects the %RV to decrease further by around 2.5% year on year due to weakening demand and increasing supply.
French ‘market bubble expected to burst’
The 2023 outlook for RVs in France is still positive as the ongoing shortage of semiconductors continues to constrain new-car supply, outweighing the impact of higher list prices. However, the ‘market bubble is expected to burst and a decline in the %RV is expected in 2024,’ according to Ludovic Percier, residual value and market analyst, France, at Autovista Group.
‘PHEVs will be most impacted in 2023 and 2024 due to the return of leased vehicles in mid-2023, which will crowd the used-car market while demand is insufficient. Furthermore, used PHEVs have an average range of 40km compared to twice that of new examples, rendering them uncompetitive,’ Percier pointed out.
Delivery times for BEVs are very long, explaining the ongoing growth in RVs. Values will be stable for 36-month-old cars, but a decline is expected for vehicles aged 12 months. BEVs available on the used-car market have a lower range than recent launches, which will negatively impact RVs in the future, although this will be slightly compensated by lower incentives.
Used petrol cars will see the greatest price increase in 2023 as demand increases. But gains will be lower in 2024, especially as more low-emission zones (ZFEs) are introduced across France.
Despite the tarnished image of diesel cars, Percier predicts that their RVs will increase further as diminishing supply meets stable demand. ‘ZFEs are only planned for cities with over 150,000 inhabitants and do not target high-mileage diesel drivers,’ Percier commented.
Upward trend for German new-car market
‘For 2023, there are signs of a recovery for both the new and used-car markets. Production seems to be increasingly available to deliver on purchase contracts that still date back to the last two years in large numbers,’ explained Andreas Geilenbruegge, head of valuations and insights at Schwacke (part of Autovista Group).
Since August 2022, new-car registrations have been higher than in the same month of 2021. Autovista24 assumes that the ‘final spurt’ at the end of 2022 returned volumes to the same level as in 2021, i.e. around 2.6 million units. However, 2021 was significantly weaker than previous years due to the supply crisis and the lingering effects of the COVID-19 pandemic.
‘We expect an upward trend in 2023, however, with about 2.8 million new cars on the roads. That should be enough to fill this year’s order books, provided production can reach the market. Should more production become available, everything would be registered if necessary – if only to produce sought-after and rare young used cars,’ Geilenbruegge noted.
Sobering picture for German used-car market
Used-car market volumes show a much more sobering picture. 2022 remained well below six million transactions, which is not only due to the lack of new-car registrations over the past two years.
‘Although the volume of young used cars endured a six-figure slump, the older age groups, i.e. cars aged more than four years and over 10 years, also contributed significantly to the difference of more than one million changes of ownership compared to pre-crisis years. Owners in these age segments showed restraint due to the economically uncertain outlook and apparently shied away from the costs and risks of replacing their current vehicle, thus depriving other potential buyers of purchase options by holding on to their current vehicle for longer,’ Geilenbruegge surmised.
This cycle can only be broken if the prospects of economic security and a decline in inflation, i.e. the cost of living, also change. Hope comes in the form of slightly declining, albeit high, single-digit inflation forecasts and falling fuel prices. ‘Even if economic experts assume a recession, a GDP contraction of 0.2% still seems bearable, especially since the outlook for 2024 is positive again,’ Geilenbruegge concluded.
Upward trend in Italy
‘The strong upward trend for RVs was confirmed for all fuel types at the end of 2022. The well-known problems of new-car supply and delivery, high inflation, and rising new-car list prices continue to affect values, even if the pace of growth is slowing,’ said Marco Pasquetti, head of valuations, Autovista Group Italy.
Autovista24 forecasts that new-car registrations in Italy will gain 18.3% year on year in 2023, but volumes are still far behind the levels seen before 2020. This is a clear sign that the industry is not yet ready for a full recovery. Additionally, it is important to remember that the availability of three-year-old used cars in 2023 is bound to be lower than in 2022 since new-car registrations in 2020 were almost 30% lower than in the previous year.
‘For these reasons, we expect a further 2.3% year-on-year increase in RVs in 2023. The most significant growth is expected for BEVs, at 4.2%, partly due to the technological advances of recent years. Over the course of the year, values will increasingly move towards stabilisation, and a slightly declining trend is expected to begin in 2024, with RVs predicted to fall 0.9% by year-end,’ Pasquetti explained.
RVs hit ceiling in Spain
‘Although new-car registrations have stopped falling year on year, the market failed to top one million units again in 2022, well below pre-pandemic figures. Moreover, there is no room for optimism as even if production manages to recover, demand is already more subdued due to high inflation and rising interest rates, as well as economic and social uncertainty,’ explained Ana Azofra, Autovista Group head of valuations and insights, Spain.
Spain’s used-car market fell for the tenth consecutive month in November, with a cumulative year-on-year decline of more than 5%. It continues to suffer from a lack of product and is unable to return to the level of two million units transacted annually before the COVID-19 pandemic. BEVs, with greater availability, are gaining a slight advantage in this context, with their volume of transactions increasing by almost 20%. Nevertheless, they account for less than 1% of used-car transactions and their share of the new-car market is still below 4%.
‘RVs seem to have reached a ceiling, as already mentioned in previous months. Despite selling days lengthening, prices maintain a certain stability, with only small downward adjustments. HEVs are bucking this trend though, with both high demand and turnover,’ Azofra noted.
In the coming months, Azofra expects RVs to shrink for petrol and diesel cars, as well as PHEVs. However, slight upward adjustments are assumed for full hybrids that benefit from the Eco sticker in Spain, as well as BEVs.
Hiatus in Switzerland’s cooling used-car market
The Swiss used-car market has experienced increasing supply for several months, but it is still lower than before the COVID-19 pandemic. Moreover, with rising living costs, used-car transactions have cooled compared to the first half of 2022.
Across all two-to-four-year-old passenger cars, the supply volume in December was 4.9% higher than a month earlier and 41.7% higher than in December 2021. The downturn in the sales-volume index took a hiatus, with an 8.6% increase compared to November, but there was still a 2% decline year on year.
With increasing demand, the average value retention of 36-month-old passenger cars grew slightly to 52% in December (up 0.7% month on month and up 14.9% year on year). BEVs posted particularly strong year-on-year %RV gains of 23.3%. Nevertheless, petrol cars are currently leading, retaining 52.8% of their original list price, followed by BEVs (50.9%), diesel cars (50.7%), and HEVs (49.9%). Meanwhile, 36-month-old PHEVs retain the lowest value, at 49.6% of list price.
The average days to sell increased in December, with a passenger car aged two to four years in stock for 71 days. BEVs are selling quickest, after an average of 64 days, followed by petrol cars after 69 days, diesel cars after 72 days, PHEVs after 100 days, and HEVs after 102 days.
‘As used-car demand is expected to weaken amid supply recovering further, pressure on RVs is to be expected. Values of three-year-old used cars will remain relatively high but with a slightly decreasing trend. We forecast that the %RV 2023 will finish 2.8% down on December 2022. For the year 2024, we expect a fall of around 3.5% year on year due to weakening demand and increasing supply,’ explained Hans-Peter Annen, head of valuations and insights, Eurotax Switzerland (part of Autovista Group).
Depreciation trend continues in UK
The depreciation trend in the UK’s used-car market continued in December, with the average %RV for three-year-old cars falling 0.6% month on month to 61.7% of the original cost-new price. Compared to December 2021, the average %RV was down 2.5%.
‘This is quite extraordinary when we consider that values increased by circa 30% in 2021. So, despite lacklustre retail demand, values remained high throughout 2022, a reflection of the lack of used stock flowing into the market. This is confirmed by the active-market volume index, which shows a year-on-year decline in available stock of about 30% during December,’ explained Jayson Whittington, Glass’s (part of Autovista Group) chief editor, cars and leisure vehicles.
For 2023, it is important to recognise that most households in the UK have already experienced shrinking disposable incomes. Whilst consumers have been shielded from the full impact of rising energy costs by the UK Government’s Energy Price Guarantee, this cap on prices is due to be raised in April 2023 – adding £500 (€578) to the average annual bill.
In addition, consumers are facing sharp inflationary pressures affecting many everyday essentials. Recent interest-rate hikes have also significantly added to the burden of mortgage holders, and the cost of car finance has also increased. It therefore seems inevitable that the UK will enter a recession as consumers grapple with a new reality.
A recession does not necessarily spell danger for the used-car market though. Past recessions have shown that the used-car market is very resilient as consumers tend to continue buying cars. However, they will perhaps look at a cheaper model or buy a used car instead of new.
It is also important to remember that in March 2020, the UK began to experience the effects of COVID-19 lockdowns, which kicked off the start of new-vehicle supply constraints. Therefore, fewer cars will be returning to the used-car market in 2023, which will help to prop up RVs.
‘So, despite some challenging times ahead, Glass’s does not expect RVs to come under serious pressure although a downward correction in the region of 5% is likely,’ Whittington concluded.
The December 2022 monthly market dashboard provides the latest pricing, volume and selling-days data.
