COVID-19 Market Update 6-3-2020 SUMMARY

June 03 2020
CBB

SUMMARY

In April we saw the largest monthly drop in wholesale prices since Canadian Black Book’s retention index was created in 2005. Adjusted for seasonality, the index dropped an additional 3.20 points in May, very close to April’s record decline of 3.58. Since February the index has fallen by 7.8 points for 2-6-year-old vehicles as a result of the COVID-19 crisis and its impact on the market. 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. Throughout the month of May we have observed that wholesale prices have continued their decline. Although used and new car retailers nationally are now able to operate with fewer restrictions than previous months, volumes remain down and future demand uncertain. Auctions are limited to online only operations; however, auction sales volume are slowly returning to pre-COVID-19 levels with bidder participation steadily growing week over week.

Prices have been falling across the industry since March. This past week the volume-weighted car segment values experienced an overall decline of 0.38%, compared to a 0.65% decline the week before. Trucks and SUVs depreciated 0.79% during the past week, which is a decline over the previous week’s 0.47% drop. This is the largest weekly decline we have seen this year. Overall, we saw the market depreciate 0.59% vs. a very similar 0.56% the week prior.

Entering the summer months, we expect wholesale and retail prices to deteriorate even further. We attribute this projected decrease to the large influx of incremental used inventory expected to hit the marketplace; the continued weakening of retail demand due to the deep recession; and corresponding unemployment numbers.

In recent months the decline in sales has been unprecedented. March saw a 48% decrease in new vehicle sales, followed by a 75% loss in April. When DesRosiers Automotive Consultants published sales today, it was a welcome relief to see that the sales decline for May was only 44%. This is still a brutal shift, but this May uptick signals some impressive improvement over April.

In March, unemployment numbers began a sharp rise in Canada, which coincided with the declarations of states of emergency, in one form or another, in every province and territory. Ontario and Quebec further ordered non-essential businesses to close. As a result, unemployment claims have quickly skyrocketed. In May, the Statistics Canada Labour Force Survey reported the unemployment rate was 13.3%, a 232% increase since February 2020. The situation is so severe that Statistics Canada changed the questions they ask part of their labour study to better understand the Canadian jobless situation. In March there was a drop in employment of over one million workers, followed by a further decline of almost two million in April, bringing the total employment decline since the beginning of the COVID-19 crisis to over three million.

As you might expect, consumer confidence has taken a significant hit given the crisis at hand. For the auto sector, a healthy level of consumer confidence is critical to sales. Lower confidence levels generally mean that consumers will defer or cancel plans to purchase expensive consumer durable goods including a new or used vehicle. The Conference Board of Canada’s Consumer Confidence Index rose by a remarkable 16.2 points for May, after hitting a record low in April. The venerable index now sits at 63.7, which is slightly higher than its lowest point during the 2008 financial crisis. The index is still down 60 points from February’s pre-pandemic mark. Over half of Canadians remain pessimistic about their future employment prospects at 52.2%, which does not bode well for the speed of recovery nationally. We may see consumers defer vehicle purchases or shift from new cars to used, despite the many generous OEM and dealer incentives offered.

On the supply side of the equation for used vehicles, we expect a large incremental influx of used inventory to hit the marketplace over the next six months. 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. 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.

Although the economic effects of the pandemic will continue to be felt as far out as three years from now, we project that wholesale values will return to the pre-COVID-19 baseline by 2023, as used supply will decline due to cuts in retail and fleet sales throughout 2020 and into 2021.

CURRENT WHOLESALE MARKET OVERVIEW

Canadian Black Book’s Automotive Analyst team has a combined 70+ years of insight and experience in the automotive industry. Through ongoing communication with dealers, remarketers, finance companies and vehicle manufacturers, our analysts track vehicle prices in order to independently chart and report the market via daily updates . In addition, our survey personnel attend (virtually at the present time) major auctions in Canada each week.

Auction Insights

• Virtual auctions being held nationwide 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 to catch-up, with the backlog of vehicles waiting to get condition reports and reconditioning performed.
• The largest auctions, ADESA and Manheim, continue to operate all locations in Canada under their respective digital platforms.

Auction Volume

We continue to see a rebound in total volume in the wholesale marketplace. 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. 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.

Sales Rate

Sales rates quickly tumbled into the teens when the pandemic initially forced the physical auctions to halt operations. However, rates have been slowly climbing each week with some instability along the way. 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. 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.

CURRENT WHOLESALE PRICE TRENDS

Market Level View

Volume-weighted, overall car segment values fell by 0.38% this past week for 2 to 8-year-old vehicles. All segments of cars decreased, except for the Premium Sporty Car segment, which remained essentially flat. We expect that several of the heavily leased segments such as Near Luxury Car will experience steeper depreciation in future months as consumers who took advantage of lease extensions begin to return their vehicles and used supply begins to build. Full-Size Car was the weakest car segment with a decline of 1.40% in one week. The Mid-Size class was close behind a loss of 1.15% this past week and 8.12% since the beginning of March. Compact Cars continued to fall, making it one of the weaker segments with a loss of 0.89% last week and 6.86% since the crisis began. However, there may be some significant opportunities for the segment as many consumers may opt for a less expensive vehicle purchase this year, in this value conscious segment. The Compact Car segment was hit hard at the onset of the pandemic as fuel prices were falling quickly which hampered market interest.

When volume-weighting is applied, the overall Truck segment (including pickups, SUVs, and vans) values decreased by -0.79% last week. Sub-Compact Crossover’s led the declines with -1.52% followed by Compact Luxury Crossovers with -1.31%. It is the subcompact Crossovers which have fallen the most since March seeing a steep drop of 9.21%, followed by Compact Crossovers. On the pickup side, Full-Size Pickups declined by 0.37% last week and in total they have declined by 4.15% since COVID-19 took hold in Canada. Small Pickup Trucks fell similarly at 0.34% this week and 4.17% since the crisis began. Mid-Size Crossovers, one of the more popular segments fell by 7.02% since early March and 1.16% last week alone.

The graph below shows week-over-week depreciation rates for the entire market, including Cars and Trucks / SUVs / Vans for the last several months. The average deprecation rates have continued to increase slowly for the market. Our analyst team feels this trend will continue towards the end of 2020.

Segment Highlight – Mid-Size Crossover/SUVs

Ousted by Full-Size Pickup Trucks and Full-Size Crossovers/SUVs, the Mid-Size Crossovers/SUV (MSU) segment accounts for the largest segments in Canada. For active busy families and outdoor enthusiasts requiring a little more ground clearance than their station wagons provided, or more seating than their pickup trucks can offer, MSUs fulfill a gap that many consumers find indispensable for everyday life. Today, the MSU segment accounts for roughly 9% of the vehicles on the road, a number that has slowly increased since the 1980’s. Going forward, we see this segment continuing to grow as OEMs offer both new and historic name plates to help increase their market share. As the popularity for this segment increases, it is now even necessary to split it into two different sub-segments, which include 2-row and 3-row MSU. Here, we have very similar sized vehicles, often within the same make, competing in the same segment, but offering consumers more specialized solutions to their everyday problems.

SUVs have become wildly popular over the standard sedan and are currently offered in almost every size imaginable. In 2006, Ford introduced the Edge, a 2-row MSU that offered consumers both the size and seating configuration they desired. We now have various OEMs producing different models that compete in the same class of vehicle. These include Traverse and Blazer, Pilot and Passport, Atlas and Atlas Cross Sport, just to name a few. It is the Oakville produced Ford Edge that takes the sales crown with nearly 20,000 units sold in Toyota 4Runner and Highlander retain their values the best after 48 months. On the Luxury side of these mid-size utilities, it is the Lexus RX 350 (also made in Canada) which has the highest sales numbers with nearly 9,000 units sold. The Lexus GX 460 has the best retained value in that segment after four years, and the vehicle won CBB’s best retained value award for 2019. As this segment evolves and adapts to consumer demand, we see it continue to pull market share away from car segments, as well as other SUV segments. With constant new introductions like the Kia Telluride, Hyundai Palisade, and Audi Q8, OEMs have some stiff competition to market against in this very crowded segment.

At the beginning of the COVID-19 industry slowdown, wholesale values for Mid-Size Crossovers began a slow decline. In May, the segment posted one of the larger declines of 4.23 points, following on the heels of a 2.56 decline in April. Rapidly falling fuel prices may help to support this segment over the longer term, while hurting smaller, fuel-efficient crossovers and cars. Like the majority of the other crossover/SUV segments, MSUs continue to depreciate each week and the expectation there will be more declines before values finally begin to rebound.

USED WHOLESALE PRICE PROJECTIONS

Wholesale Price Impact Under the Most-Likely Economic Scenario

Wholesale prices continued their decline in May as uncertainty over the impact of COVID-19 and the response dampened vehicle demand, resulting in an overall wholesale price decline of 3.20% in May alone. Typically, used prices are strong during the spring market making the actual results, in terms of performance as compared to expectations, that much more severe. Wholesale prices were down 0.99% in March, 3.58% in April and now just over 3% for May with a total decline of 7.76% since February.
Canadian Black Book’s outlook reflects a new economic reality – projected values will continue to stay well below pre-COVID-19 projections over the next two years.

Short-Term Outlook (Summer/Fall of 2020)

We project a drop in wholesale prices compared to a pre-COVID-19 baseline this summer/fall as the Canadian economy suffers through the effects of COVID-19. We anticipate that wholesale prices will be 17% lower, on average, compared to pre-COVID-19 projections, during the remaining months of 2020. We see a larger difference over the summer with recovery commencing early in 2021. 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. 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.

Long-Term Projections (36-Month Residual Values, Summer / Fall of 2023)

The effects of the pandemic will continue to be felt three years from now. However, we project that residual values will return to the pre-COVID-19 baseline as used supply will decline as a result of lost retail and fleet sales throughout the remainder of 2020 and into 2021.

Wholesale Price Impact Under a Severe Recession Scenario

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. 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.

RETAIL ENVIRONMENT

Retail Prices

We continue to see decreases in retail asking prices as consumer confidence struggles to recover from the large hit it took in May. Currently, retail prices are decreasing at a much lower rate compared to wholesale prices. We expect retail prices to decline further, at a higher rate, as consumer demand weakens over the next several months, hence narrowing the gap between wholesale and retail prices.

Retail Insights

• May is historically a very strong month for car sales. Usually the month makes up a little over 10% of annual sales for the industry. The dealers we talked to were hoping this year would help to make up for some of the weakness witnessed in March and April. With a stronger May behind us and now June well underway we expect to see stronger buying in the lanes to backfill sold retail units.
• Dealers are continuing to remain “cautiously optimistic” that the price stability and uptick in retail sales will last.
• Hesitancy remains when it comes to sending trade-ins or unwanted inventory to auction for disposal, but with low wholesale values, the auction has become a good source of inventory.
• After two months without production lines running, concern continues to build for new car dealers about the level of inventory and how long it will be before they receive new units from manufacturers.

New Vehicles Sales Outlook

Our New Sales Outlook remains unchanged from our last update. We anticipate a significant reduction in Canadian new vehicle sales in 2020 (both retail and fleet sales) due to continued reduced consumer demand. This is the result of a number of factors, including fewer kilometers driven due to remote work and lock-down initiatives, high unemployment, and a severe erosion of consumer confidence. New sales were down 39% during the first five months of the year compared to last year.

In our base economic scenario (A), we project a 25% drop (compared to pre-COVID-19 projections) in new sales in 2020, to 1.436 million units. In a deep economic recession scenario(B), we project a 40% drop in new sales in 2020 to 1.149 million units. In the longer-term, we expect new sales volume to return to pre-COVID-19 levels within five years.

USED VEHICLE SUPPLY PROJECTIONS

Canadian Black Book projects a dramatically higher than expected used vehicle supply in the wholesale marketplace for the rest of 2020 due to several factors:
• Delayed lease returns resulting from lease term extensions offered by OEMs
• Extensive de-fleeting by rental car companies due to lack of consumer demand
• Dramatic reduction in auction activities due to COVID-19 in March, April, and May
• Increased repossessions due to deteriorating economic conditions
• Higher than historical lease return rates with fewer consumers buying out leases
• In Canada 2020 and 2021 were already big years for lease maturities, with falling values and economic uncertainty this may push lease return rates up, due to fewer buyouts by lease holders.

Short Term Lease Return Projections

When we started this year, lease maturities were projected to hit a record volume of above 400,000 units. Once the pandemic was underway and most manufacturing stopped, OEMs worked to facilitate lease extensions in order to push returns further into 2020 and to be able to reliably provide replacement vehicles. As a result, we project at least 60% more additional units in the second part of 2020 (compared to the pre-COVID-19 estimates) due to a slowdown in sales in March/April/May, along with expected turn-ins of the lease extensions.

Rental Unit Returns

Business and leisure travel collapsed at the end of March. We expect a significant reduction in both categories for the remainder of 2020. Air travel has fallen by more than 90% in Canada. In addition, there is no expectation that travel will return to pre-COVID-19 levels in the next several years. According to IATA (The International Air Transport Association), air travel will not return to pre-COVID-19 levels until after 2023. This puts tremendous financial pressure on rental companies that rely on air travel to reduce both their current fleet and future acquisitions. Last week, Hertz filed for bankruptcy in North America as a result of the pandemic.
In addition to Hertz, we expect other rental companies to reduce their fleet during the summer and fall months to match lower demand for rentals. This practice will lead to over 25,000 additional rental units hitting the wholesale market over the next six months.

Longer Term Used Returns Projections

With the reduction in retail and fleet sales over the next several years, we project approximately 8,000 fewer used units per month in the market in three years, compared to previously projected returns. This lower level of used inventory will be beneficial to used car prices as supply will be limited.

About Canadian Black Book

For almost 60 years, Canadian Black Book has been the trusted and unbiased Canadian automotive industry source for vehicle values. Today the company has grown into a leading data provider of vehicle valuations, residual value forecast solutions and VIN decoding. Canadian Black Book tools and information are considered ‘The Authority’ for vehicle values not only by car dealers and manufacturers, but also the leasing, finance, insurance and wholesale sectors. In 2020 Canadian Black Book is bringing to market its Enhance Vehicle Matching (EVM) solution, which will allow the industry to more consistently decode 7 digit VINs down to a specific trim package allowing a more precise vehicle valuation.