• This past week, Canadian wholesale vehicle prices continued to show stability in the market. This trend has been prevalent for a month, a great departure from the market volatility since the spring. • Car segments decreased in wholesale value last week by -0.03%, and Trucks also decreased by an identical -0.03%. This is the second week in a row that both segment groups have shown small declines. • U.S. wholesale used vehicle prices declined again for both Car and Truck segments. Car wholesale prices fell significantly by -0.74% and Trucks were down by -0.39%. • The average days to turn for used car inventory listed for sale increased this past week to a 14-day moving average of 46 days. Generally, days to turn have been trending lower since June. • Consumer confidence trends continue to show weakness. This past week, the Bloomberg-Nanos Index showed its third-straight decline to its lowest level since mid-August.
As we near the end of the month of October, we continue to observe the wholesale vehicle market is much more even-tempered compared to the volatility the industry has endured for much of 2020. For this past week, our analyst team reports the thirteen Truck segments and eight Car segments both declined on average by an identical -0.03%. This weekly variation is quite small compared to what we would usually expect this time of year, when prices typically decline. Last week’s results mark two weeks in a row where both Car and Truck segments have shown declines, albeit fairly small ones. The general market trend is visible in the graphic below. The black line charts the average weekly change for the 22 market segments Canadian Black Book tracks.
This past week Scotiabank Economics released its most recent Global Auto Report. Although recent sales results are positive around the world, the report reminds the reader that so far this year sales are down globally by a staggering 21%. The document forecasts that global auto sales will rebound by 10% next year, raising it to within 9% of the pre-pandemic levels. With many nations in Europe still contending with staggering numbers of new COVID-19 cases, it will likely continue to be a difficult year from both a production standpoint and a consumer demand point of view.
The Bank of Canada released the result of its business outlook study last week. In summary, the business sentiment in Canada has measurably improved over the summer months, but still remains near all-time lows. This is primarily due to great uncertainty as to how the virus will impact demand for goods and services. Businesses responding to the survey shared that they feel their sales prospects are limited by much weaker demand and by precautionary health guidelines. Currently their investment and hiring plans remain conservative, due to the high level of economic uncertainty. The Bank of Canada maintains the outlook that a full economic recovery will be long and difficult. However, on a positive note, the bank reports that the economy rebounded much more swiftly than what was anticipated as restrictive measures were lifted in the summer. They do expect that the second phase of the recovery, which they refer to as the “recuperation phase,” will be uneven and protracted.
Not surprisingly, Canadian consumer confidence levels took a hit this past week, after the current second wave of COVID-19 resulted in restrictions on businesses and social gatherings. The Bloomberg-Nanos Canadian Confidence Index dropped more than half a point to 51.9. This is the third-straight decline reported in the weekly index, which brings it to the lowest level since mid-August.
This past week Automotive News Canada reported on the issue of inventory shortage, as we have discussed regularly in our weekly update. The story echoes the feedback our team has heard from Canadian retailers. The lack of vehicles is a serious issue for businesses and customers alike. The restriction in supply is one of the key factors keeping used vehicle wholesale prices at this very high level.
In other significant economic news, The Conference Board of Canada released an economic outlook, that was specific down to the Canadian city level . This outlook suggests that the pace of economic recovery will flatten, and perhaps stall, in the short term. They observe that despite the fact that many aspects of the economy have experienced some measure of recovery, other enterprises will not return to pre-COVID levels of success until a vaccine is widely available. In a rather peculiar result, the Conference Board also notes that despite large amounts of unemployment, they expect that household real disposable income to increase this year by more than 9%, as well as savings rates. This is largely due to households cutting back on spending voluntarily or due to businesses being closed, as well as government assistance programs. For 2021 and 2022, they forecast an improvement in unemployment rates to 7.6% and 6.3%, respectively. They also expect an increase in housing starts nationally by 2.1% for 2021, a positive sign of an economy in rebuild mode.
Last week, Statistics Canada reported that the recovery in retail sales in Canada is slowing down. This is based on August data, well before the current resurgence of COVID-19. Retail sales had only a small gain of 0.4% for the month August, according to the most recent report. This number fell short of what was expected by economists. After the economy was put into lockdown in April, there were huge declines in retail sales. Following that period, retail sales increased for four months straight, through August. Full recoveries were seen in all major categories except cars, gasoline sales and clothing. Since that time, the pace of retail sales improvements has slowed significantly. Early estimates by StatsCan suggest that retail sales will be flat in September. They also feel the outlook for retail sales is not positive, given the recent spike in cases and the numerous restrictions now in place in Ontario in Quebec.
Specific to used vehicle retail sales, the most recent results as measured by Statistics Canada, show a small decline of -0.6% for August. By comparison, last year used car sales increased by 0.6% from July to August. This decline follows a dramatic rebound in sales, after retailers were allowed to reopen across Canada and consumers restarted shopping. It is safe to assume that the shortage of available product, as well as consumer confidence, are contributing factors to this decline.
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.
• Canadian wholesale auctions remain essentially status quo since the switch to exclusively online-only options in the spring. This forced transition was due to restrictions and concerns regarding health and safety due to COVID-19. • Today most auctions allow potential buyers to visit the auctions’ compounds to review inventory planned for upcoming sales. The bidding is done online, however most auctions are using a live auctioneer to facilitate sales. • It remains unknown as to when Canadian wholesale buyers will be able to return to the lanes to bid in-person. The typical large market auctions attract hundreds of attendees, which is not permissible under the various governments’ restrictions.
We now have a full four weeks of the fall market in the books. So far this season, the CBB analyst team has noted consistent weekly auction volumes. The volumes are lower than normal for this time of the year, and certainly much lower than during the summer months, which is partly due to normal seasonal slowdowns. There are also smaller than expected numbers of lease returns coming to auction each week. Due to the general shortage of used vehicles in the market, many lease end vehicles are claimed by the grounding dealers and not being brought to auction. Of those destined to be sold, the ever-growing selection of closed auction options and other digital auction platforms are processing quite a bit of the available volume, which diverts yet more vehicles away from the open auction.
We continue to view the market as being in an ongoing state of short supply. Last week in our market analytics, we noted that the number of days to turn for used vehicles listed for sale by retailers, increased by one day to 46 days. The trend over the past four months has been a steady decline, from a high of 75 days at the end of May.
Concerns regarding short supply in the market include new vehicles as well. By this time of the year, the industry should be far along the transition to the next model year. However, this year it is expected that several 2021 model year vehicles will see delays in their rollout to retailers. This will result in tight inventory levels or some models with near zero stock. Many retailers have reported having drastically less stock on some models or being completely out of others.
In an interview with Automotive News last week, Toyota announced that they were performing quite well from a production perspective. Chris Reynolds who is the head of manufacturing for Toyota North America, indicated that Toyota was at 93.7% capacity, which is only down 2.2% from the same time last year.
Auction Sales Rate
The sales success rate or sell-through rate at auction, have slowed this past week. In the summer we consistently noted over 80% sales rates. This past week they were down from the week before, with an estimate rate at 60%. The rate is lower than what we would expect for this time of year. In the coming weeks we expect some consignors will lower floor prices and reverse that trend. The number of active online bidders remains strong. In one noteworthy auction last week, almost 400 bidders were online in one lane alone.
CURRENT WHOLESALE PRICE TRENDS
Car and Truck segments declined by an identical -0.03% for the week. To provide a frame of reference, from the beginning of May, the average (absolute value) change in Car values on a weekly basis has been 0.22%, and 0.32% for Trucks. For the same week last year, the change in Car values was -0.30% and for Trucks a decline of -0.26% was noted. Despite the upheaval year to date, we appear to be in a much quieter and stable phase of the market, at least for the time being.
Of the nine Car segments, six decreased for the week and three increased in wholesale value. These metrics cover 2018 back to 2012 model years. The largest decline was for the Mid-Size Car segment at -0.42%. Sporty Car’s decline of -0.32% was the second largest negative adjustment. Sub-Compact Car was down again last week by -0.28%, marking seven consecutive weeks of lower values for that segment.
Three segments did see gains last week. Premium Sporty Cars’ increase of 0.22% was the strongest performance. This was followed by Near Luxury Car at 0.15% and Luxury Car at 0.11%.
This past week also marks two weeks in a row of loses in Truck values. For the week, the Truck segment fell by -0.03%. For the past two weeks, wholesale price changes have been quite small, the previous week saw a decline of just -0.02%. From a purely practical standpoint, these can be considered flat as far as trending is concerned.
Of the thirteen market segments we track for Trucks, the results were divided. Seven segments were down, and six segments were up. Small Pickups had the largest increase at 0.58%. Generally, this segment has been quite strong. With the exception of one “off week,” the segment has seen thirteen consecutive weeks of growth in values. The second-best showing was the Compact Van segment, which was up 0.47% for the week. This was followed by Full-Size Trucks, which have been in positive territory for 12 weeks with a gain of 0.20%.
Of the seven Truck segments, which did see declines in value this past week, it was the Sub-Compact Luxury Crossover segment which shed the most amount of value with a decrease of -0.50%. This marks three weeks of declines for the smallest luxury crossovers. The Sub-Compact Crossover was also down for the week at -0.34%, followed by Minivans at -0.33%, to cap off the bottom three performers.
For the past six weeks, the average change of the Car and Truck segments has been 0.05%. Last year, pre-COVID of course, the average change for the similar period of time was 0.25%. Canadian Black Book does have the expectation that values will decline when supply improves, and as the economy continues to struggle to recover.
The much smaller week-over-week swings in values are shown in the graph 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.
CANADA AND USA MARKET COMPARISON
This past week, the U.S. market continued its trend of notable losses for both Car and Truck segments. Trucks were down for the seventh week in row, with a loss in wholesale value of -0.39%, which is very similar to the previous week’s result of -0.35% and the week before that of -0.34%. Over the past three weeks the average weekly decline for the Truck segments is now -0.36%. This recent trend in losses follows 15 straight weeks of gains in value, when the segments were in rebound after the sharp declines caused by COVID-19 in April and May.
Last week, the Car segments in the U.S. also showed large losses for last week of -0.74%. This performance extends the run of value deterioration for Cars to eight consecutive weeks. The average decline over that period is -0.52% per week.
This past week, the Canadian dollar again remained almost unchanged. It closed the week at $0.7610 U.S. for one Canadian dollar, an increase of $0.003 after last week’s decline of $0.003. Compared to one month ago, the CDN is up by just a penny. 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 continued to weaken again this past week. In Canada, we have not seen that consistent level of decline. However, during this crisis the U.S. market has often been a leading indicator of what may happen in Canada, several weeks later.
USED WHOLESALE PRICE PROJECTIONS
The past few weeks have seen wholesale prices stabilize greatly. 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 an incredible 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 currently at an all-time record high of 109.
With much weaker retail demand, and a projected increase in supply of used inventory expected, we forecast a 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)
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.
At retail, asking prices have risen a small amount, on average, from the middle of September. The estimated increase from the lowest level for asking prices is just under $200. This is based on analysis of just over 85,000 vehicles, listed for sale in Canada by retailers. So far in October the asking price trends have remained flat. This more stable price level follows some three months of consistent declines in asking prices.
With the price of vehicles at wholesale rising during the rebound phase of the market and at the same time, the asking prices at retail falling, our conclusion is that retailers’ used vehicle margins had been under tremendous pressure during the pandemic. Gross profit at retail has been greatly compressed during the pandemic. We estimate that it declined by just over $900 from June to September.
• With less than a week of selling remaining in the month of October, we look forward to retail sales reporting that will be released shortly. There will only be an estimate for the month, as not all OEM’s report actual sales each month. Several of our sources are reporting a softer than expected month. However, so much of the outcome for October depends on the usual level of frantic activity in the final week. • So far this year, the industry has reported a massive sales decline of -23.7%. September was estimated by DesRosiers Automotive Consultants to be up 2.4% as compared to the same month last year. • 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 new 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. • The shortage of new vehicles is expected to exert pressure in the tight supply of used vehicles.
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 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 new car 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’ time. Our Scenario A forecast remains the more probable one, despite a resurgence of the virus in the fall. Unless we return to significant lockdown measures, this is the forecast for the remainder of 2020.
Although it is to be expected that measures of social distancing will be elevated and other restrictions may return, the widespread closure of auto retailers’ sales and service operations is not expected as was the case in the spring.
USED VEHICLE SUPPLY PROJECTIONS
Canadian Black Book projects slowly building used vehicle supply in the wholesale marketplace for the fall- winter months. 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 increased by one day 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.
• 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 much smaller numbers than earlier in the summer.
A gradual increase in repossession activity is expected before the year concludes. We expect this to continue into 2021. 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 continuing to work with borrowers to arrange a plan for repayment that avoids the repossession of the vehicle.
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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