COVID-19 Weekly Automotive Market Update 12/22/2020

December 22 2020
CBB

All the best for the Holiday season. From our team at Canadian Black Book to you.
Please note, this will be our last update for 2020. Look for our market updates to continue into 2021.

SUMMARY

• Last week Canadian wholesale vehicle prices for Cars and Trucks declined for the tenth week in a row.
Car segments decreased in wholesale value, on average, by -0.15% from the previous week.
Truck segments decreased in wholesale value, by -0.44%, which is the largest decline for Trucks since late May of 2020.
The Canadian dollar set another two-year high on Thursday of last week, at $0.7863. If the rising CDN dollar continues, this will create negative demand pressure for Canadian exports of used vehicles to the U.S.
U.S. wholesale used vehicle prices weakened again for both Car and Truck segments last week. Car wholesale prices fell by -0.72% and Trucks were down by -0.50%.

As 2020 comes to a close, it has been a wildly different year for all, quite unlike what anyone had expected. At the beginning of the year, the Canadian Black Book team had projected that 2020 would yield small declines in new and used vehicle sales, along with a slow softening of wholesale prices. We also expected a record year for lease returns and as a result a small boom in market supply for used vehicles. Some estimates forecasted a 25% chance of a U.S. recession, while there was less certainty around the chance of that happening here in Canada.

Instead, what the auto industry has ended up with is the largest decline in new vehicles sales since the Second World War. To facilitate that, the economy witnessed the largest increase in unemployment ever recorded with modern data, a huge retraction in GDP growth, all followed by equally spectacular rebounds, across many sectors. A roller-coaster or perhaps a pandemic bungy jump into the unknown may begin to describe the volatility of 2020.

Certainly, the news is more positive of late, in many regards. The beginning of the end is now within reach. There are approved vaccines in Canada that are being dispensed to our most vulnerable and front-line healthcare workers. Last week it was announced that Canada will receive 168,000 more doses of the Pfizer vaccine by the end of December and 500,000 more by the end of January 2021. If the Moderna vaccine is approved, which is expected shortly, there will be 168,000 doses of that vaccine by the end of December as well. As more of the population is vaccinated, and restrictions are finally scaled back, some form of economic normalcy becomes a little closer each day.

Specific to automobile sales, there remains some considerable headwinds. Quebec recently announced an extended lockdown that commences as of December 25, and runs until January 11, 2021. Then yesterday Ontario announced a similar lockdown that will last, for some parts of the province, until January 23, 2021. During that time retailers will still be able to sell vehicles, on an appointment only basis. This is a great improvement over restrictions earlier this year that did not allow customers in showrooms at all. To put the restrictions in perspective, Quebec and Ontario together represent 61% of the Canadian population. With that large a portion of the market significantly slowed for new vehicle sales, we can expect 2020 to have a weak ending, 2021 to have a very slow start, for both new and used sales.

The expectation for next year is that there certainly will be adversity in the market. One of the most unpredictable factors will be the supply of both new and used products. Last week Volkswagen announced that it is adjusting global production for vehicles that use its MQB vehicle architecture, which includes the Golf and Tiguan. This type of problem will likely not be unique to the Volkswagen Group.

The global deployment of the vaccine will be slow. As a result, the restoration of stability to general public health will take time, as will the stability of production of parts and vehicles. Plants will open and close, and logistics will not run anywhere near normal levels. The expectation is that there will be a lot fewer vehicles produced, compared to what the market demands.

The one sector of the economy that continues to buck the trends is the housing market. For years, a shortage of supply, especially of single-family homes, has maintained a large amount of unmet demand. That shortage, along with historically low interest rates, has propelled growth in prices. For the month of November, sales continued strengthening, from already elevated levels. Home prices reached a record, for the month, although sales declined 1.6% from October. The average home price in Canada is now $650,100, which is an increase of 11.5%, over the past 12 months. Conversely, it was reported last week that rent has fallen by as much as 20%, in some parts of Toronto, as many are moving out of the densely populated downtown.

A key factor of growth for many years in Canada has been immigration. Not surprisingly, immigration numbers in 2020 have been far lower than expected. Population growth essentially ceased, in the third quarter, due to the impact of the various travel restrictions. It was noted to be the lowest quarter for population growth since 1946. So far this year, the Canadian population has only grown by 0.5%, about one third of the general expectation.

Remarkably low interest rates are directly tied to the Bank of Canada’s effort to keep the economy moving with available funds and an exceptionally low rate of inflation. Last week, Statistics Canada reported that inflation rates are increasing for the first time during the pandemic. The annual rate of inflation increased to 1% for November, a bump up from the 0.7% observed in October. This is the largest increase since February of 2020, yet it is comfortably less than the Bank of Canada’s 2% target rate. This is beneficial to the automotive sector, as it helps keep borrowing costs for loans and leases low and stimulates demand for new vehicle sales. It is expected that interest rates will likely remain low for the next two years or more, providing a lasting incentive for consumers to acquire new vehicles.

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

• Canadian wholesale auctions end 2020 and will begin 2021 in an online only format. This is essentially the mode they have operated in since late spring of 2020.
• Last week the team at Canadian Black Book again reported fewer bidders compared to the beginning of the fall. It is now typical to see fewer than 200 bidders in a lane, even in the busiest auctions.
• Auction operators continue to allow potential bidders to visit the auction yards to review vehicles before sales begin. This is helpful at building bidder interest and confidence in the product.

Auction Volume

Usually, at the end of fall and beginning of winter, there is a decline in wholesale volumes and in prices. Currently, our team has noted that in general, auction volumes have been slowly declining since mid-September. CBB estimates that auctions are now approximately 25% lower in volume, since October.

We end the year with a significant shortage of used vehicles, which has been a constant issue over the past number of months. With a 10% decline in new vehicle sales in November and an expected weak December, the number of trade-ins entering the wholesale market will continue trending downwards. This lack of used product entering the market will aggravate the supply situation further.

One reason for such short supply is that it does perpetuate itself. Due to the downturn in new cars sales and resulting scarcity of used car trade-ins, a much larger than normal percentage of grounding dealers are buying up end-of-lease vehicles. Some lenders are reporting that certain in-demand vehicle types are seeing close to zero returns at end-of-lease, and instead are being bought out for the residual. This partial diversion of lease returns means substantial supply is not hitting the auctions. Compounding this are the various (very successful) upstream closed auctions that are diverting even more stock from the open auction.

For the remainder of the year and well into 2021, it is Canadian Black Book’s expectation that the wholesale market will continue to remain short of used vehicles. Over the past week, our proprietary market analytics tools reported that the 14-day moving average (it is denoted by the green line below) number of days to turn for used vehicles, listed for sale by retailers, rose by one day to 48. It has hovered close to this mark since mid-October. The trend over the past four months has been a steady decline, from a high of 75 days, at the end of May. The low for the year was 45 days, back on October 11th. For the level to be more “normal,” we would need to see a gain to above 60 days, which is a significant gap, considering we are well into the slower time of year. CBB expects that many retailers, given all the market uncertainty, may also be strategically keeping inventory levels much lower than normal, for the time of year.

Our outlook is that there will continue to be shortages of new product into next year. Given that the global battle against COVID-19 has taken a turn for the worse in recent weeks, it is expected that interruptions to component production and vehicle assembly are inevitable, for the foreseeable future. The disappointment of not being able to source a new 2021 may drive some consumers to shop for lightly used vehicles. This switchover will place added demand on the used market, in a time when supply remains exceptionally low.

Auction Sales Rate

Last week’s sales success rate, or sell-through rate, at auction remained 10% lower than the preceding week, with an average of 40%. This is the lowest we have seen in recent months and surprising given the market feedback on short supply. The assumption is that buyers are looking for year-end deals and the consigners are not willing to compromise their floors to sell units. Overall, recent rates are much lower than the high rates (consistently 90%+) seen earlier this year. Given these low sales rates and softening prices, our team anticipates that sellers will be forced to lower floor prices in order to sell more product, early in the new year. Last week, our team noted a very slim sell rate of 11% in one lane, which is quite a change compared to late spring, where some lanes were close to 100% on a regular basis.

CURRENT WHOLESALE PRICE TRENDS

As has been the trend since early October, Canadian Car and Truck segments’ average wholesale values, both declined last week. Car segments fell by -0.15%, and Trucks by -0.44%. For the week, Trucks have declined -0.10% more than the previous week. Cars also declined more than the previous week, yet only by -0.05%.

Last week’s results make it ten consecutive weeks of average declines in wholesale values. This follows a period of over a month of very stable, almost flat value changes. The average weekly decline, during the past four weeks, has been -0.16% for Cars, and -0.26% for Trucks. A review of December 2019 data shows that the average weekly drop at this time last year was -0.36% for Cars and -0.41% for Trucks. In 2018 it was -0.39% for Cars and -0.31% for Trucks. Up to now, the widespread shortage of vehicles is helping to keep prices elevated. CBB expects this gradual weakening trend in prices, to continue well into 2021.

Of the nine Car segments Canadian Black Book tracks, only one gained for the week. Premium Sporty Car was up 0.9% for the week, outperforming the segment average by 0.24%.

Eight of the segments saw value losses. The largest decline in value was seen by the Full-Size Car segment, which was down by -0.79%. Sub-Compact Car yielded the second largest decline for the week at -0.59%. The third largest decline was in the Compact Car segment, with a decrease of -0.31%. The Compact and Sub-Compact Car segments have been challenged for much of 2020, with both often producing the largest weekly losses.

Last week also marks ten consecutive weeks of wholesale value declines for Trucks, with an average loss of -0.44%. Last week’s result is a steeper decline compared to the -0.34% drop from the week prior to that.
Of the thirteen market Truck segments CBB tracks, all but one were down in value last week. The only segment that saw increases was the popular Compact Crossover/SUV grouping, with an increase of 0.17%.

The largest decreases for last week were seen in the Compact Luxury Crossover/SUV segment at -0.99% and the Minivan Segment, which posted an identical loss. Compact Vans declined by -0.81% and posted the third largest decrease for the week.

Full-Size Pickup Trucks, the second largest segment in Canada by volume, was again down last week by -0.35%. This is the largest decline the segment has seen since the end of May. Last week’s result made it five weeks of declines, after fifteen weeks of increases for that popular segment.

Weekly changes, on a percent basis, in wholesale values are shown in the graph below. This is the output 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

Last week the U.S. wholesale auto market continued its streak of significant week-over-week value declines. Both Car and Truck segments again decreased for the week. Trucks were down for the fifteenth week in a row, with a loss in wholesale value of -0.50%, steeper than the -0.42% loss from the previous week. U.S. Car segments showed losses of -0.72%, slightly lighter than the previous week’s -0.80% decline. This performance extends the run of value deterioration for Cars, to sixteen consecutive weeks.

Last week the Canadian dollar continued to strengthen and closed out on Friday at $0.7828 U.S. for $1.00 CDN. On Thursday, the dollar set a new two year high at $0.7863. Over the past week the margin of change is minimal at only $0.0004, however, the $0.02 gain since Labour Day is significant.
There is still some buffer before the CDN hits the mid $0.80 range, which is where CBB feels exports of vehicles to the U.S. become much less desirable. The dollar is up a remarkable $0.09 from the low on March 19 of this year. If the Canadian dollar continues to strengthen, this of course makes Canadian vehicles more expensive for U.S. buyers, decreasing demand and putting downward pressure on prices.

Recently, values in Canada have continued on a decline. However, we have yet to see losses as large as the U.S. market has experienced. It is our expectation that Canadian declines will continue well into 2021, before a more lasting recovery takes place.

USED WHOLESALE PRICE PROJECTIONS

November had an average month-over-month price increase of a very slim (when adjusted for seasonality) 0.2%, which is an increase of 2% from November of 2019. Back in October, the average wholesale price change for the month was an increase of 1.40%. Going back even further, 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.

In September, the Index set a new all-time record high of 109, which only lasted 30 days on top, until the October Index was calculated. In October, the Index hit the 110.5 mark and set another new record. Compared to the same time last year, the Index is now up by 2.3%. Compared to January 2020, the Index is up by 2.1%. This rapid “V shaped” recovery shows how robust demand has been, and the effects of restricted supply of vehicles in the Canadian market.

Our expectation is that used vehicle retail demand will slowly weaken and the market will see a gradual increase in supply of used inventory. Due to these market forces, Canadian Black Book forecasts a continued drop in wholesale prices this winter, relative to highs 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 slow decline in wholesale prices compared to the pre-COVID-19 baseline this 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 wholesale prices will still be 10% lower, on average, compared to our spring 2020 pre-COVID-19 projections, over the next three to nine months. We expect to see more declines through the winter months, with a lasting recovery beginning later 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 value and will only decline by 8%. This is an optimistic revision to our previous forecast, which was made in mid-August, as the initial rebound 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

For the first week of December, the average asking prices for vehicles listed for sale on dealer lots has posted a small increase, but by only $6. The 14-day moving average is now at $28,491. This is still up by a little over 1%, from one month ago. With inventory continuing to be short, it is not surprising that price trends are positive. Asking prices have had consistent, but mild, week-over-week increases since October, after rebounding from a low for the year in mid-September. Since mid-September, CBB estimates average asking retail prices have increased by $530. This estimate is based on analysis of just over 85,000 vehicles on a weekly basis, listed for sale by retailers in Canada. This upward trend in price follows three months of consistent declines that began in May.

Retail Insights

• The whole industry waits patiently for the final new car sales tally of the year. At the end of Q3, sales were officially down by -23.7%. Since that time, there has only been estimated industry sales numbers, based on the voluntary reporting of a minority of manufacturers.
• DesRosiers Automotive Consultants, estimated for October that new car sales was down by -2.1%, followed by an unexpected large decline of -10.4% for November, which is the largest decline since the -16% result in June.
• For December, the expectation is another down month, especially given the various measures of lockdowns giving consumers so many reasons to stay away from retailers.

NEW VEHICLES SALES OUTLOOK

Our New Vehicle Sales Outlook remains unchanged from our last update. We continue to expect the year to close out with a significant reduction in Canadian new vehicle sales. This year has seen dramatic impact on both retail and fleet sales, due to weaker overall demand, interruption of operations and great economic uncertainty.

There are a number of other factors at play. This includes a reduction in the number of kilometers driven by consumers, due to millions of Canadians working from home. The various social distancing initiatives, resulting in high unemployment, and a severe erosion of consumer confidence, have all radically cooled the market. All these factors negatively impact consumer demand.

In our base economic scenario (A) from the spring of this year, we had projected a 25% drop (compared to pre-COVID-19 projections) in new sales in 2020, to 1.436 million units. The market is currently at a decline of 21.6% and the end result is now expected to be similar to that value. In our initial deep economic recession scenario (B), we projected a 40% drop in new sales in 2020 to 1.149 million units. This was the scenario that was expected had retailers remained closed in large numbers, as they were in early April. Thankfully, that did not occur. In the longer-term, we expect new sales volume to return to pre-COVID-19 levels within five years’ time. For 2021 the return of sales to more normal levels hinges on our ability to deal with the effects of the virus and to rebuild the Canadian economy.

USED VEHICLE SUPPLY PROJECTIONS

Canadian Black Book projects a slow build-up of used vehicle supply in the wholesale marketplace, for the winter months. The days to turn for used inventory remain considerably shorter than earlier in the pandemic, when inventory turnover stagnated, due to shutdowns of operations and consumers being in lockdown. For this past week, the 14-day moving average for days to turn for used cars increased by one to 48 days.
• Last month’s 10.4% drop in sales means there are fewer trade-ins coming into the market.
• Many months of reduced new and used sales, and a resulting reduction of trade-ins, have 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 will begin to happen in greater numbers as personal bankruptcy filings increase and lenders begin to focus more resources on collecting past due accounts.
• Again, last week it was noted that the number of listings continued to increase, by approximately 13% since mid-October of this year.
• For 2021 there are well over 400,000 leases expected to terminate, similar to the record number in 2020. These units coming to market in 2021 will help provide much-needed supply relief.

Repossessions

There has been a mild uptick in repossession activity in the industry, but it remains much lower than expected by many. We expect an increase in repo activity into 2021.

It was noted that the number of insolvency filings in October rose by 6.1% compared to the previous month. The total number of insolvencies was still 38% lower than October 2019. The positive side of bankruptcy and repossessions, if there is one, is that they do create used vehicle supply for the wholesale market.

There are several reasons for the lack of repossessions so far in 2020. 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 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 them to arrange plans for repayment that avoids the repossession of the vehicle. Prudent lenders realize that flooding the market with thousands of repossessed units will result in lower proceeds as prices will be depressed by a surge of supply.

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. .

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