COVID-19 Weekly Automotive Market Update 10/13/2020

October 13 2020
CBB

Canadian Black Book COVID-19 Market Update

SUMMARY

Vehicle prices continued showing greater stability in the Canadian wholesale marketplace last week.
Car segments increased in wholesale value last week by 0.01%, and Trucks also increased by 0.12%. These are very similar changes compared to the previous week’s results.
U.S. wholesale used vehicle prices declined for both Car and Truck segments this past week. Car wholesale prices fell by a substantial -0.92% and Trucks were down by -0.34%.
• The average days to turn for used car inventory listed for sale decreased again last week with a 14-day moving average of 46 days. This is down three days from the previous week and much lower than typical.
• Our team expects that vehicle shortages for new cars will remain a challenge for the industry. There remains a great risk to production of components and vehicle assembly, as many regions in the world struggle to get significant second waves of COVID-19 under control.
• For September, the unemployment rate declined for the fourth consecutive month, falling 1.2 percentage points to 9.0%.

Thanksgiving celebrations for 2020, or the lack thereof, will not easily be forgotten. For many Canadian families, it is an important weekend of celebration and reflection for all that is cherished in our lives. This year however, families were collectively discouraged by health officials from getting together for these special events in person, as Canada is well immersed in a second wave of COVID-19. In just the past seven days, the average national case count increase per day has been over 2,200. This is a shocking increase compared to the first seven days of August, when the average number of new cases was 315, an increase of almost 700%.

Daily New Cases of COVID19 in Canada Oct 13, 2020
Source: Heath Canada

The health crisis at hand, if not well managed over the coming weeks and months, runs the risk of interrupting vehicle sales again. Ontario and Quebec have seen new COVID countermeasures in recent weeks. Quebec has declared large portions of the province as COVID-19 red zones, with very specific rules and restrictions on travel. In Ontario, some of the virus trouble spots have again seen the closures of bars, restaurants, and gyms for the next 28 days, with the hope of getting the virus under control again. The disruption to the economy in both provinces is significant. Estimates in Ontario regarding restaurant closures alone, suggest it will impact over 60,000 workers just in three regions (Peel, Toronto and Ottawa).

Given this most recent virus news, it is not surprising that again this past week’s consumer confidence, as measured by the Bloomberg-Nanos Index, remained flat. The Index has not improved since August, suggesting Canadians apparently do not see reasons to feel their economic prospects are improving and confidence has stalled. The study found that only a scant 18% feel the economy will improve in the next six months. The only positivity amongst consumers in the survey appears around housing price trends, which they expect to remain positive in the coming months.

From a wholesale value point of view, last week was very much a repeat of the week before. Truck segments increased by an identical 0.12% to last week’s gain. Car segments rose by a slim 0.01%, after decreasing by the same amount the week before. This spells stability for the marketplace, at least for the time being.

The week of October 5 did see some positive economic news from a number of facets of our beleaguered economy. On Friday, the much anticipated monthly Labour Force Study (LFS) was released by Statistics Canada. In September, the LFS concluded that employment rose by 378,000 or 2.1%. The economy is now within 720,000 jobs of its pre-COVID February level. The past month saw employment levels increase in every province except New Brunswick and PEI. The largest gains were noted in Ontario and Quebec.

The national unemployment rate declined for the fourth consecutive month for September, falling 1.2 percentage points to 9.0%. There were 1.8 million unemployed Canadians in September, down 214,000 (-10.5%) from August, and continuing the four-month downward trend from the record-high 2.6 million unemployed Canadians in May.

Statistics Canada. Table 14-10-0287-01 Labour force characteristics

The proportion of Canadians receiving the Canadian Emergency Relief Benefit (CERB) or regular Employment Insurance payments, fell from 16.1% in August to 13.5% in September. Statistics Canada concluded that while some industries face a long recovery to pre-COVID employment levels, some sectors, including manufacturing, have almost fully recovered.

This past week the federal government announced positive news for businesses who rent their space. The Canada Emergency Rent Subsidy will provide funding of up to 65% of rental or mortgage costs for businesses suffering from revenue declines, depending on the scale of losses. Businesses forced to close due to local shutdown orders will receive a 25% top up. The new rent subsidy will run until June 2021 and claims can be made retroactively back to Sept. 27. The government also announced its wage subsidy program will be extended until June 2021, which is good news for auto retailers struggling due to the industry wide drop in sales.

The positive news for the past week continues as we examine the numbers of bankruptcy filings. The number of insolvency filings in Canada has fallen to its lowest level since 1996. The various assistance programs from the government as well as some additional latitude from lenders have allowed many households to stay out of the financial danger zone during the crisis. For the month of August, there were 6,464 consumer bankruptcy filings. This is down 42.7% from the same time last year.

As reported by CBC news this past week, there appears to be a parallel story to the shortage of new and used vehicles in another part of the economy - major appliances. During recessionary times typically sales of what economists refer to as consumer durable goods, which includes vehicles and major appliances falter significantly. However, appliance stores are seeing strong demand for product and widespread supply chain problems. This has caused product shortages and backorders heading into the Christmas season. Appliance retailers suggest a combination of a boost in home renovations, new construction, discounts for energy-efficient appliances, as well as pent-up demand following store closures have led to record sales. Seemingly eager to spend, shoppers now must deal with limited inventories or long wait times for delivery. The expectation is that the shortage of appliances could get unmanageable, as COVID continues to worsen for many parts of the world. The businesses of washers, dryers and refrigerators sounds a little like the auto industry’s current predicament.

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 auctions, dealers, remarketers, finance companies and vehicle manufacturers, our dedicated team of Canadian market analysts closely track vehicle prices in order to independently monitor and report the market via daily price updates. In addition, our survey personnel and industry analysts attend (virtually at the present time) major auctions in Canada daily.

Auction Insights

• The Canadian used vehicle wholesale auctions continue to operate in an online-only mode due to restrictions regarding health and safety due to COVID-19 nationally.
• Currently the major auction operators allow potential buyers to walk the lot for vehicles in upcoming sales, but the bidding is exclusively online.
• It is highly uncertain as to when Canadian wholesale buyers will be able to return to the lanes to bid in person. The typical auctions in the large markets attract hundreds of attendees, and this would not be permissible under the various government restrictions.

Auction Volume

At the mid-point of October, the CBB team has observed that Canadian auction volumes remain consistent week-over-week. Volumes at open auction remain lower than normal for this time of the year. This is due to smaller numbers of lease returns, and generally smaller numbers of vehicles being wholesaled in the open auctions. Many vehicles are being held onto by dealers at lease end, or trade in, and not being brought to auction. Of those sent to auction, the various upstream closed auction options and other digital auction platforms are processing quite a bit of the available volume, which diverts vehicles away from the open auction.

Our analysts note that there remains a low level of used supply. A recent survey of Ontario dealers by The Ontario Motor Vehicle Industry Council (OMVIC) indicates that 78% of dealers report having difficulty sourcing new and used products. The number of days to turn for used vehicles listed for sale by retailers, fell by three days again this past week, with a 14-day moving average of 46 days. The number has dropped by 40% since the end of May.

Supply concerns extend to new vehicles. By October of a typical year, the industry would be well underway transitioning to the next model year. However, this year there are many 2021 model year vehicles that will be delayed. These delays, along with disruption of 2020 production, is creating uncertainty around new car inventory levels and may temporarily put demand pressure on used car sales, as retailers look to make up for lost new car transactions. In a recent report J.D. Power noted that days to turn for new cars fell from over 108 days in May to around 68 days in September, which is a remarkable decline.

Auction Sales Rate

Sales success at auction remains consistent. Not as high as what CBB had observed in the summertime, yet still stronger than the norms. On average, our observed sales rate last week was again approximately 70%. This past week we noted buyers from well over 3,000 km away in the U.S., bidding and buying multiple units in Ontario.

The amount of participation in online auctions remains strong. Our team reports that more than 150 active online bidders in just one lane is now commonplace.

CURRENT WHOLESALE PRICE TRENDS

For the week of October 5th, the CBB team noted a week of value changes that, on average was very similar to the previous week. This is evidence of a more stable market, at least at the present time. We noted near flat values for Cars and strengthening for the Truck segments identical to the previous week. Car segments were up in wholesale value by 0.01% and Trucks increased by 0.12%. Car wholesale values have been virtually flat for a month now, after an earlier five-week positive run. The Truck side of the market has seen growth for two weeks, following two weeks of marginal declines.

Of the nine Car segments, five increased for the week and four declined. The largest rise was seen in the Near Luxury Car segment at 0.25%. The second strongest segment for value gains was Mid-Size Car at 0.18%, Luxury Car was in third place with an increase of 0.14% for the week.

Four Car segments declined last week; the biggest drop was Full-Size car at -0.63%. The Sub-Compact Car segment again saw weaker performance as the second largest decliner with a -0.36% loss. This is much smaller than the decline Sub-Compact Cars saw the week before at 1.13%. The segment has seen regressions for five weeks running with an average weekly loss over 0.50%. With an average national fuel price at $1.04 per litre, this segment does not have the same appeal as it did just 18 month ago, when fuel was over $1.30 per litre. Prestige Luxury Car was down by -0.20% for the week, cancelling out last week’s gain for the segment of 0.16%.

The Canadian wholesale Truck market segments increased in value this past week on average by 0.12%, an identical amount to the previous week. These two consecutive weeks of positive movement follows two weeks of small declines of -0.02% and -0.07% respectively. Eight Truck segments saw strengthening values for the week of October 5. Leading the way was the Full-Size Crossover segment with a gain of 0.50%. This was followed by Compact Vans, which increased by 0.39%, and Full-Size Pickup with a 0.29% surge. This marks ten weeks in a row of positive movement for the ever-popular Full-Size Pickup segment which has not had a down week since July. This is a testament to the fact that Full-Size Pickups are high demand items, both for sale domestically and for export to the U.S. The largest decliner was Small Pickup at 0.27%. The Sub-Compact Luxury Crossover at -0.13% and Compact Crossover/SUV at 0.09% both saw values drop slightly last week.

Prices in the market have calmed in the month following Labour Day. We have noted much smaller weekly wholesale price changes. For the Truck segments, the average change has been 0.07%, and a mere 0.03% for Cars over the last four weeks. These smaller adjustments are visible in the graphical output below, from one of our proprietary wholesale market analysis tools, Canadian Black Book Visual Analytics. In the line graph below (Canada – Weighted % Change in Value by Segment for 2- to 8-year-old models), we illustrate trended changes in wholesale value week-over-week. The data set is based on our team’s review of transactions collected and analyzed from the Canadian wholesale market.

Car segments are displayed in blue, and Trucks are denoted by the red line. Light trucks include Vans, SUV/ Crossovers, and Pickup Trucks. In April of this year, values showed a sharp decline as a result of the chaos created by the pandemic. As you will recall, this is the time that many areas in Canada were under mandatory shutdown orders and many other regions saw voluntary closures of dealerships.

It is the expectation of our team that the next phase of this volatile Canadian automotive market will see additional value declines, before they finally do stabilize in late 2020 and early 2021.

CANADA AND USA MARKET COMPARISON

This past week, the U.S. market again saw declines for both Car and Truck segments. Trucks were down for the fifth week in row, with a loss in wholesale value of -0.34%. This is the largest drop in U.S. truck prices since the week of May 15 when prices dropped on average by -0.62%. Previous to this recent run of declines, the U.S. Truck segments had fifteen straight weeks of gains.

The Car segments in the U.S. also showed a large decline for last week of -0.92%. This is the largest decline for American Car segments since a -1.32% decrease the week of May 1. This is now six weeks of consecutive losses for Cars, south of the border. The recent trend is consistent, and a steeper decline compared to the Truck segments.

Last week, the Canadian dollar was up by a full cent from the week before. It closed the week at $0.7613 U.S. for one Canadian dollar. Compared to one month ago, the CDN is essentially unchanged with a difference of only $0.002. Any depreciation of the Canadian dollar is beneficial to those exporting vehicles from Canada to the U.S. The demand for units to export helps to keep Canadian values strong and stable. If the dollar strengthens, this has the reverse effect; it makes Canadian vehicles more expensive for U.S. buyers, and therefore a bit less desirable.

As noted, U.S. market wholesale values continue to weaken again this past week. In Canada we have not yet seen that decline. However, during this crisis the U.S. market has often been a leading indicator of what would happen in Canada, several weeks later.

USED WHOLESALE PRICE PROJECTIONS

Wholesale prices in Canada saw one category (Trucks: +0.12%) with reasonable gains this past week and then another (Cars: +0.01%) that remained almost flat. These value changes are not exceptionally large, which has been the trend since a month ago after the Canadian market halted a long run of rising values. Before the change in direction, Trucks had been increasing in value for eight weeks and Cars for five weeks.
Looking back to previous months, wholesale prices fell on average -0.99% in March, -3.58% in April, just over -3% for May, and June was flat. In July, values rose by a remarkable 3.18%, or 3.20 CBB Index points. August saw a new record gain of 3.73 Index points or 3.60%, which was the largest increase in the history of Canadian Black Book’s Value Retention Index since it started in 2005. For September, the Index rose by 1.5% and is now 0.7% higher than the same month last year. This places the CBB Index at an all-time record high of 109.

With much weaker retail demand, and a projected increase in supply of used inventory, we forecast a significant drop in wholesale prices this fall and winter, relative to the heights seen in recent months. This will be followed by a more lasting recovery and greater stability of values, depending on the general state of the economy and demand for vehicles.

Short-Term Outlook (Fall/Winter of 2020)

We project a continued weakening in wholesale prices compared to a pre-COVID-19 baseline this fall/winter as the Canadian economy suffers through the harsh effects of COVID-19. In August, we revised our outlook based on positive signs, in terms of used vehicle pricing trends. We expect that wholesale prices still will be 10% lower, on average, compared to our spring 2020 pre-COVID-19 projections, during the remaining months of 2020. We expect to see more declines through the fall months, with recovery beginning early in 2021.

Our outlook forecasts Car segments will decline by 13% during this period of time. However, we do expect that Truck and Crossover/SUVs will lose less ground and will only decline by 8%. This is an optimistic revision to our previous forecast, which was made in mid-August, as the recovery in values has been stronger and earlier than expected.

We also anticipate that older (more than six-years-old), less expensive vehicles in average condition will not decline as much due to increased demand for these units. The selective demand lift is expected to be driven by consumers seeking low cost, reliable transportation. COVID-19 and the resulting social distancing practices are expected to cause some regular transit riders and ride sharing customers to transition to vehicle ownership, which will fuel some incremental industry sales.

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.

RETAIL ENVIRONMENT

Retail Prices

Along with cooler fall weather has come cooler market price changes. Again, this week wholesale prices for Cars remain flat and Trucks demonstrated mild gains. At retail, asking prices have started to show small increases after a strong downward trend that began back in June. Currently, there is a mild rebound in listing prices of just under $200. Interestingly, previous to the recent rebound, the downward slope in asking prices was completely the opposite to the nearly three months of gains in wholesale prices.

Our assessment had been that Canadian retailers’ used vehicle margins had been under tremendous pressure. Gross profit at retail has been greatly compressed during the pandemic. We estimate that it has declined by just over $900. During this same period of time, CBB has noted that days to turn for inventory remain considerably shorter than earlier in the pandemic. For last week, the 14-day moving average for days to turn for used cars decreased by three to 46 days. The conclusion remains that retailers are turning the inventory they do have very quickly, however at much lower gross profit per unit compared to back in June.

In the graph below we show Canadian Black Book’s analysis of vehicles listed for sale by retailers in Canada. It does not include vehicles offered for sale by their owners. The noted asking prices do not necessarily relate directly to the final transaction price, as retailers do have flexibility on each deal. Market feedback remains that supply of good used vehicles is coming up short. As supply grows in the coming months, we expect both wholesale prices and active listing prices will fall.

Retail Insights

• New light vehicle sales for September 2020, as estimated by DesRosiers Automotive Consultants, were up 2.4% as compared to the same period last year.
• As of the end of Q3, the industry has reported a massive sales decline of 23.7%.
• For the rest of 2020, in fact, until an effective vaccine for COVID-19 has been widely deployed, it is expected that the disruption of new car supply, and new car parts, will continue to be a factor globally.
• The consistent feedback from our clients remains that a shortage of certain vehicles will be a problem for the coming months. This is due to the widespread interruption of vehicle assembly and parts manufacturing globally, as well as cutbacks in forecasts that were made in the spring of 2020 when the crisis was at its worst.

New Vehicles Sales Outlook

Our New Vehicle Sales Outlook remains unchanged from our last update. We continue to forecast a significant reduction in Canadian new vehicle sales in 2020 (both retail and fleet sales) due to weaker overall demand. This is the result of several factors, including fewer kilometers driven due to remote work arrangements and lockdown initiatives, high unemployment, and a severe erosion of consumer confidence. All of these factors negatively impact consumer demand. New sales were down 23.7% during the first nine 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 our initial deep economic recession scenario (B), we projected a 40% drop in new sales in 2020 to 1.149 million units. Given the current status of COVID-19 in Canada, positive work to combat the virus and sales results so far, this harsher scenario will thankfully not occur. In the longer-term, we expect new sales volume to return to pre-COVID-19 levels within five years. Our Scenario A forecast remains the more probable one, despite a resurgence of the virus. Unless we return to significant lockdown measures, this is the forecast looking forward.

Although it is to be expected that measures of social distancing will be elevated and other restrictions may return, the widespread closure of retailers’ sales and service operations is not expected.

USED VEHICLE SUPPLY PROJECTIONS

Canadian Black Book projects higher used vehicle supply in the wholesale marketplace for the fall-winter months due to several factors:

• Our market metrics show that used inventory is turning at a 14-day moving average of 46 days this past week, down 3 days from the previous week, and considerably from the 73 days observed in early June.
• Many months of reduced sales, and a resulting reduction of trade-ins, has depleted the number of vehicles available to be bought and sold on the wholesale market.
• CBB believes this shortage to be temporary, with more supply expected in the coming months, especially as repossessions begin to happen in greater numbers.
• The delayed lease returns, resulting from lease term extensions offered by OEMs, continue to come back to market, but in smaller numbers than earlier in the summer.

Short Term Lease Return Projections

At the beginning of 2020, lease maturities were projected to hit a record volume of more than 400,000 units for the year. Once the pandemic was underway and most manufacturing stopped, OEMs worked to facilitate lease extensions in order to push returns further into 2020, when they would be able to reliably provide replacement vehicles. Those vehicles have started to come back to be remarketed and will continue well into the fall. As a result, we project at least 60% more units will arrive in the second part of 2020 (compared to the pre-COVID-19 estimates) due to a massive slowdown in sales in March/April/May, along with expected late turn-ins of the lease extensions.

Rental Unit Returns

The travel sector remains stalled due to widespread restrictions and cutbacks in consumer spending on travel. In the September throne speech, the Federal Government announced that there would be financial support for regional airline routes. The intent is for the industry to continue to provide to Canadians affordable regional air services. This is in response to many airlines cancelling routes. Some carriers such as Porter Airlines, which offered services primarily in the eastern portion of the country and to some U.S. destinations, remains closed completely. They plan to resume service in mid-November.

A government assistance program may help to create some more demand for air travel, and as a result, some greater demand for the rental industry.
The travel sector remains in its largest slump ever, as a result of the pandemic. International arrivals into Canada remains down by 95% in 2020. The Canada-USA border is closed, at least until October 21, and only a small amount of travel is permitted.

In June, the most recent month that Stats Canada has data for, there were only 3.1% of the number of international visitors due to restrictions here and abroad. Statistics Canada recently reported that the number of passengers being carried on aircraft in Canada hit its lowest level in 40 years.

As a result, the airport rental car business remains down in volume considerably. Rental car companies have seen an increase in what they refer to as the “home city” business, which are rentals by local residents. These rentals can be used to replace a car that is in the shop for repair work or to travel within Canada.

In a typical year in Canada, 200,000 vehicles are sold to rental car firms, or just over 10% of the total volume in the industry. These vehicles remain in operation for 12 to 18 months until they re-enter the market as used vehicles. Given the current trends in rental demand, the reduction in rental cars could very well be in excess of 100,000 units for 2020, which alone will account for more than 5% loss of used car supply in Canada.

With such a significant reduction in business, the market will not have remarketed rental car units as a source of lightly used vehicles in 2021 and 2022 to the same degree as previous years.
Repossessions

An increase in repossession activity is expected before the year concludes. This is certainly a regrettable part of the economics of the COVID-19 crisis. The positive side of repossessions is that they do create used vehicle supply for the wholesale market. So far this year, there has not yet been a large spike in repossession activity.

There are several reasons for the lack of repossessions. At the beginning of the crisis, lenders offered relief for customers’ loan and lease payments (anywhere from 30 days to, in some cases, up to six months). This certainly could help many consumers to get back on better financial footing and hopefully resume payments when the deferrals concluded. Even for borrowers who are behind in their payments, it appears that many lenders are working with borrowers to arrange a plan for repayment that avoids the repossession of the vehicle.

The government assistance programs have aided consumers’ ability to make car payments if they lost their jobs during the crisis. This assistance has kept the actual number of repos lower and prevented an increase in supply in the wholesale market. Should the Federal government scale back emergency assistance programs in a material way, it would be expected to cause an increase in repossessions.

Professionals in the repossession business have been preparing their operations based on this expectation, and in some cases, hiring and training more staff to meet the expected demand in the latter part of 2020.

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 17 digit VINs down to a specific trim package, allowing a more precise vehicle valuation.

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