COVID-19 Weekly Automotive Market Update 6/16/2020

June 16 2020
CBB

This month in The Value:

Summary

At the midpoint of June, we continue to see wholesale prices in Canada decline slowly. All Car segments for 2-8-year-old vehicles fell by 0.58%, almost the same as last week’s 0.60% decline. Over the last eight weeks, wholesale car values have seen a 0.54% decline on average each week.

The Truck/SUV/Crossover segments fell by 0.68%, which is a smaller drop than last week’s 0.85% decline. On average over the past eight weeks, the truck segments have declined by 0.61%. Please note that these are weekly adjustments, so when you consider how much of a decline this would be over 52 weeks over a year, the numbers are daunting. The Canadian Black Book Value Index for 2-6-year-old vehicles fell an additional 3.20 points for May, very close to April’s record decline of 3.58. There is still half of June to come, however directionally we are seeing a similar decline, perhaps even slightly steeper for the month.

It remains our outlook that wholesale prices will continue to decline, until we reach a total decline of 17% industry wide. We have not yet seen retail asking prices follow the wholesale trends, but that is to be expected in the coming months. In the past week, the Organization for Economic Cooperation and Development (OECD) released its global economic outlook. The view was quite stark when compared to the relatively positive view that existed only a few months ago. The report expects that output (GDP) will contract by 9.4% in 2020 if there is a second wave of COVID-19. If the nation escapes a resurgence of the virus, the reduction in economic output would “only” be 8%. The recovery of the Canadian economy will likely not get back to pre-pandemic levels until the end of 2021 or beyond. During that time period, it is expected that unemployment will remain high.

In our update from last week, we wrote about the importance of used vehicle exports to the U.S. as a factor in price stability. Each year there is a considerable volume of vehicles that are exported south from Canada to the U.S. market. In 2019, the total was nearly 300,000, according to DesRosiers Automotive Consultants. This systematic removal of a very large amount of supply from the Canadian market is one of the key forces behind the rise in wholesale prices, happening from the latter part of 2010 until the recent virus crisis. This has also directly helped to keep Canadian residual values high and make leasing an affordable option for consumers.

On July 1 of this year, the new United States-Mexico-Canada Agreement (USMCA) for trade comes into place. This replaces the North American Free Trade Agreement (NAFTA) which had been in effect since the beginning of 1994. There are new rules as part of USMCA, which will determine if a vehicle can cross North American borders on a tariff free basis. These rules around local country content become more severe over time, demanding more localized content and imposing a myriad of rules about wages and how the value of content will be determined.

What this will mean at the border crossing on a day-to-day basis remains a little unclear. The tax on most vehicles entering the U.S. would be 2.5%, if the vehicle is not certified as compliant with the USMCA rules. This is not great news; however, it may just be the cost of doing business for certain vehicles. On the other hand, if the vehicle is a pickup truck or a two-seat cargo van, the rather steep 25% tariff, also known as the “chicken tax,” could apply for certain vehicles.

The only parties in a position to help an exporter avoid the 25% tax by certifying a vehicle complies with the USMCA agreement are the manufacturers themselves. So, will the manufacturers offer assistance by certifying certain vehicles for export under the new USMCA rules? That is doubtful, as it would be a significant amount of incremental work for a vehicle manufacturer. However, if the OEMs do not provide export credentials for pickup trucks in particular, it could mean a very deep decline in pickup truck prices here in Canada along with an associated lowering of residual values. In general, the export of pickup trucks that are non-compliant with USMCA will stop. This would make leasing one of the affected pick-up trucks in Canada a more costly option for consumers.

As we get closer to the July 1 start of the USMCA, we hope there will be some more clarity on how the new rules of the trade agreement will be applied. There is also the possibility that the three governments involved in the agreement may grant additional time before the rules are enforced, especially given that some of the details around USMCA were only provided in the first week of June.

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 price updates. In addition, our survey personnel attend (virtually at the present time) major auctions in Canada each week.

Auction Insights

• The new normal of digital-only auctions continues to grow in popularity across Canada. Our team noted that one Ontario auction nearly had three hundred online bidders last week— an impressive number by any measure.
• Several auctions are allowing bidders to view products in person, ahead of the online auction. That step should improve bidder confidence in the lanes for those that prefer to see the vehicles in person before putting money on the line.
• We have also noted much higher sales rates (the percentage of vehicles in each auction lane that sell) overall. In some cases, the sales rates are higher than pre-pandemic levels.
• The largest auctions, ADESA and Manheim, continue to operate all locations in Canada under their respective digital platforms.
• The Lachine, Quebec-based ESP auction is the only physical auction in Canada that we are aware of that is open for in-lane bidding.

Auction Volume

We continued to see volume growth in the wholesale marketplace last week. As the auctions recall more staff nationally, this will increase the capacity for sales. Previously, the throughput of wholesale auctions was very limited by the closure of all physical auctions and temporary reductions in staff. Total volume has yet to return to prior year levels. The number of sales bottomed out around an 80% year-over-year decline when most auctions closed their physical sales in March. It is our estimate that auction volumes are running at about 75% of normal rates today with more improvement expected in the coming weeks.

Sales Rate

The auction lane sales rates quickly tumbled into the teens when the pandemic initially forced physical auctions to halt operations. However, rates have been slowly climbing each week with some instability along the way. This past week, we observed sales rates which exceeded 80 percent. For some auctions, there were still very low rates, which highlights regional differences across the country. We still feel the sales rates have a few more weeks of improvement before they are all back to normal levels.

CURRENT WHOLESALE PRICE TRENDS

Market Level View

Volume-weighted, overall car segment values fell by 0.58% this past week for 2012 to 2018 vehicles. All segments of cars decreased, except for Full-Size Cars and Mid-Size Cars which had increases of 0.56% and 0.10%, respectively. The largest decline of the week for cars was the Luxury Car segment which was down by 0.87%, followed closely by its smaller sibling segment the Near Luxury Car at -0.83%. Prestige Luxury Cars, at the highest end of the segments, had a tough week with a downturn of 0.68%. In the past month, car segments have seen weekly declines in total of 4.31% but have fared better compared to the trucks which have witnessed 4.88% in weekly declines.

When volume-weighting is applied, the overall Truck segment (including pickups, SUVs, and vans) values decreased by -0.68% last week. This decline is a 0.10% sharper drop than the car segments in the same period. The business focused Compact Van Segment was the biggest decliner at -1.59%. Compact Luxury Crossovers/SUVs, which is certainly a highly popular segment with consumers, brought 1.27% less money than the previous week. There were no improvements made last week in value for any of the truck segments. Minivans had the smallest decline at 0.28% and Full-Size Pickups were very close at -0.30%. Given the size of the Full-Size Pickup segment, it is worth mentioning that they have performed much better than the industry average decline during the crisis. They have only had a 3.83% decline since the week of March 20, as compared to all the Truck/SUV/Crossover segments which have had a 6.40% decline.

The graph below shows week-over-week depreciation rates for the entire market, including Cars and Trucks / SUVs / Vans back to January 1, 2020. The average deprecation rates have continued to increase slowly for the market. Our analyst team feels this trend will continue until the latter part of 2020 when a recovery in values is expected.

Segment Highlight – Compact Cars

Canadians for many years have been in love with the Compact Car segment. In 2015, Compact Cars were overtaken in popularity by SUV/Crossovers. Today, about 12% of cars sold in Canada are Compact, compared to 2013 where it was a much more substantial 23%, almost double the tally today.

We would be remiss if we wrote about this segment and did not mention the Honda Civic. For those of you who keep track, the feisty Civic has been the bestselling car, of any size, for the past 22 years. In 2019, Honda Canada sold just over 60,000 copies of the vehicle. It was bested in total sales by the Toyota RAV4, RAM Pick-up and the Ford F-150. The RAV4 was the first ever crossover to sell more than the Civic.

During the COVID-19 crisis we have the expectation that vehicles in the Compact Car segment, over the longer term, will fare quite well from a value standpoint as more Canadians adopt a frugal mindset during this recessionary period. The Compact Car segment typically offers better value than the Compact Crossover/SUV segment, so we expect greater demand from consumers.

Compact Cars declined in value by 0.35% last week, a bit better than all other car segments, posting a 0.58% decline. In the last month, they had a total of -4.90% weekly declines as compared to the car segments in general, which posted a total of 6.14% of negative adjustments by our analyst team. When we review our Canadian Black Book Value Retention Index, we see that the peak for this segment (for 2-6-year-old vehicles) was in September 2019. Since that time, the curve has had a steep downward slope, with a total fall of 8.4 Index points, as shown in the graphic below.

If fuel economy is one of the reasons for consumers to buy into this segment, and it usually is, the current gas price situation has not helped. In September, the average price of fuel per liter was around $1.14. Since that time, it has fallen to a low of just over $0.75 and then back up to $1.00. It may seem like a long time ago when the precious liquid was over $1.30 on average nationally. All of this chips away at the household business case for buying a fuel sipping Compact Car. Over time, SUVs have improved fuel economy scores, which have made them that much more attractive to Canadian consumers, who in the past had looked at smaller vehicles.

When we look at how the segment performs in regard to retained value, the Toyota Prius V that takes the retained value crown. The Prius V still hold a remarkable 67% of its original price, four years after purchase. The Toyota Prius and Corolla round out the (all Toyota) top three for the segment. The average retained value for the entire segment is 47% after four years, which shows what a standout performer the Prius V is.

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

This week, as we examine about 500,000 listing prices across Canada, we don’t see a big change. This is noteworthy, especially given the decline in prices we have seen in the wholesale market. It does not appear that the consumer market has seen the price reductions witnessed at wholesale. Since the week of March 8, listing prices have gone up by almost 2%. The orange line in the graphic below represents the 14-day moving average (MA 14) for the market.

We do expect retail asking prices to decline, as consumer demand weakens over the next several months. For now, the sellers out there are bravely holding the line on asking prices.

Retail Insights

• June is usually the second busiest month of the year for new vehicle sales in Canada, after the month of May. Typically, it is a little over 10% of sales for the year. A real make-it-or-break-it month for the business. This year however, it is reasonable to expect that the typical seasonality will be disappointing, given the widespread disruption of COVID.
• Our industry contacts still speak about a sense of optimism for June. We expect that many will have a strong month with the possibility of besting June 2019 in the cards for a few.
• We do have some concerns that much of the demand in the market is pent-up and not the natural pace for the COVID-19 influenced marketplace.
• After two months without production lines running globally, 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. Substituting a lightly used 1-2-year-old unit may be a good strategy for some retailers and consumers, especially if it can be had with the peace of mind of a CPO program and a healthy amount of warranty.

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 several 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. Our projections assume that June through December will be strong months and will make up the lost ground of January through May.

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 coming months 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 more than 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.

On May 22, Hertz filed for bankruptcy in North America as a result of the pandemic. Media in the U.S. report that Hertz plans to sell some 30,000 vehicles per month to satisfy its creditors once the plan is approved. Its total U.S. fleet is over 500,000 vehicles. The fleet size in Canada is unknown from public data sources. In a typical year in Canada, over 200,000 rental vehicles are sold to rental firms. Generally, rental car operators keep these vehicles 12 to 18 months until they re-enter the market as used vehicles. If rental car players remarket these vehicles in large numbers earlier than expected, it will apply additional downward pressure on prices, due to the sudden influx of supply.

In addition to Hertz, we do expect other car rental companies to reduce their fleet during the summer and fall months to match lower demand for airport 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 17 digit VINs down to a specific trim package allowing a more precise vehicle valuation.