Used Supply: Looking 4 Years Ahead

Canadian dealers have heard rumors of expanding used supply for a few years now, but the process has been slow.

According to the latest Canada Industry Report from ALG, more used units are set to begin flowing in - but again, it will not happen overnight.

ALG predicts that between this month and July 2018, used supply will increase by 178,000 units.

"We can say with high confidence that increasing supply will be exerting a gradual negative pressure on values, though there are other opposing forces which will partially offset this trend. Movements by segment are even more challenging, as demonstrated by segments that exhibit a divergence from the overall trend," the report stated.

Of course, expanding supply of used vehicles "dramatically impacts their potential resale value," ALG analysts pointed out.

As such, during the same four-year period, ALG predicts vehicles returning to the market in 2018 will average 41 percent retention, down quite a bit from 47 percent retention seen in the first half of 2014.

That said, not all segments will see supply expand.       

As the new-car and used-car market are intrinsically linked, segments that have experience declining sales for the past few years will continue to be in scarce supply.

For example, ALG picked out the full-size car and full-size utility segments.

ALG expects used supply for both these segments to drop by over 20 percent over the next four years.

According to the report, in the short term, used market supply is forecasted to remain unchanged as a whole, and therefore will have no impact on residuals this month and through August.

Through July and August, overall segment retention rates will range between a drop of 0.4 percent to a slight rise of 0.5 percent.

The minivan segment will see the largest negative impact, with retention predicted to drop by 0.4 percent, while the premium full-size utility segment is expected to rise by 0.5 percent.

Looking into the future, ALG took a step into the past, as well, to predict long-term used-car supply expansion.

In 2009, new-vehicle sales and leasing dropped off to just over 1.46 million vehicles sold.

ALG pointed out new-car sales continued to lag over the next to years, pushing up slightly to 1.68 million vehicles sold in 2012.

"The repercussions of these historically low sales years from 2009-2011 continue to affect both supply and prices of used vehicles today. In fact, the bottoming out of the used-vehicle supply (aged 7 years or less) last year aligned with the sharp reduction in lease and overall sales volumes back in 2009," ALG analysts said.

As leased vehicles and new cars generally make it back into the market around the four- to seven-year return period, low sales in 2009 continue to impact used supply today.

"The current growth in new-vehicle sales along with higher lease penetrations will eventually solve the used-vehicle inventory constraints - though it will occur gradually with full recovery not forecasted until 2017," ALG analysts predict.

And, of course, this trend will serve to push prices down at auction, putting less pressure on dealers' pockets while stocking their used lots.

"With used values riding high in the current market, it can be difficult to envision a market that is significantly lower in just four years' time, particularly with demand continuing to strengthen. But the used supply picture is key to understanding the downward pressures that will be exerted on prices over the next few years," the report concluded.

Used Supply: Looking 4 Years Ahead............. www.redlineautosales.ca/used-supply--looking-4-years-ahead.htm