June has flown by in a blur, as we are now at the start of the last full week of the month and approaching the mid-point of a volatile 2020. In normal times, the month of June would typically make up 10% of new car sales volume for the Canadian auto industry. Between May and June, that volume would normally total around 21%. The two months, often referred to as the “spring selling season,” were of paramount importance in years past.
Not to worry, right now very little is normal, and we can toss out our views on ‘normal’ seasonality, which have been static for decades. Thankfully, we have been hearing strong and consistent feedback from Canadian dealers that this month is going extremely well. Some are even expecting that it might be better than June of last year. Hopefully this positivity continues for the remainder of 2020.
As of this past Friday, we continue to see wholesale prices in Canada march downwards, albeit much more slowly than in recent weeks. Car segments for 2-8-year-old vehicles fell by 0.16%, the smallest decline we have seen in the last 12 weeks. In the month of June, the average weekly adjustment in car values has been -0.45%, which makes this past week’s performance a significant shift.
The Truck/SUV/Crossover segments fell last week by 0.30%, which is a much smaller drop than we have seen in the past eight weeks. We would have to go back to the week of April 17 to find a smaller decline, where in that week a -0.27% adjustment took place. On average, over the past eight weeks, the truck segments have declined by 0.58%. Please note that these are weekly adjustments, so when you consider how much of a decline this would be over 52 weeks, the numbers remain exceptionally large.
Given the current sum of adjustments for the month, we are expecting that the Canadian Black Book Value Index for 2-6-year-old vehicles will decline for June, but not at the level of April’s record decline of 3.58%.
There is still a week of June to come, however directionally over the whole month we still see a decline. That said, the decline is lessening, and some select vehicle segments are in fact, going up in value. It remains our outlook that wholesale prices will continue to soften, until we reach a total decline of 17% industry wide. We have not yet seen retail asking prices in the market follow the wholesale trends, but that is to be expected in the coming months.
Recently, 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) in Canada 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%. In their view the Canadian economy will likely not get back to pre-pandemic levels until the end of 2021 or beyond. During that time, 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, 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 early 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 around wages and precisely how the value of content will be determined.
What this will mean at the border crossing on a day-to-day basis for used cars remains 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, a considerably harsher tariff of 25%, also known as the “chicken tax,” could apply.
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 used 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, it could mean a decline in some pickup truck prices here in Canada. In general, the export of pickup trucks that are non-compliant with USMCA will cease due to the 25% tariff.
As we get closer to the July 1 implementation of the USMCA, we hope there will be additional clarity on how the new rules of the trade agreement will be applied to used vehicles. 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.
• The new normal of digital-only auctions continues across the country. The level of online bidding continues to intensify. • It was noted that one auction lane in Ontario posted a 96% sales rate this past week, an impressive tally. • In general, this past week saw exceptionally strong sales rates nationally. • The largest auctions, ADESA and Manheim, continue to operate all locations in Canada under their respective digital platforms. • The Lachine, Quebec-based ESP auction remains the only physical auction open in Canada.
We continued to see significant 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 70% of normal rates today with more improvement expected in the coming weeks.
The weeks of rock bottom, in some cases single digit sales rates at auction, are now behind us. Rates have been slowly climbing each week with some instability isolated to certain auctions along the way. This past week, we observed sales rates which frequently exceeded 80 percent with some in the 90 percent range, which is well above pre-COVID levels.
CURRENT WHOLESALE PRICE TRENDS
Market Level View
Volume-weighted, overall car segment values fell by a much smaller 0.16% this past week for 2012 to 2018 model year vehicles. Not all segments of cars decreased. Four segments increased, and the same number fell. Subcompact Car, Compact Car, Midsize Car and near Luxury Car saw value growth. The biggest gain was in the Sub-Compact Car segment which rose by 0.59%.
The largest decline of the week for cars was the Luxury Car segment which decreased by 0.78%. This was followed by Prestige Luxury Cars with a downturn of 0.41%. In the past four weeks, the Car Segments have seen weekly adjustments, on average equaling -1.73%, a much smaller decline than trucks which have seen -2.62% in total adjustment in the same period.
When volume-weighting is applied, the overall Truck segment (including pickups, SUVs, and vans) values decreased by a much smaller 0.30% last week. This decline is less than half the 0.68% decline of the previous week.
Several segments saw improvements this week. The Sub-Compact Crossover/SUV segment improved in value by 0.57%. Four other Truck segments also saw small improvements, which is a positive sign indeed, compared to the last few months. These segments all grew less than 0.11%, however, a noteworthy shift versus what we have seen recently. The business focused Compact Van Segment was again the biggest decliner at -0.99% this past week. Full-Size Luxury Crossover/SUV at -0.77% and Mid-Size Luxury Crossover/SUV at 0.69% rounded out the three largest negative adjustments.
Full-size Pickup and Small Pickup were also still both showing negative adjustments last week. Small Pickup at -0.66% fared much worse that the Full-size which only declined 0.26%. Small Pickups in the past month have had -2.53% in weekly adjustments whereas the Full-size has declined, yet less than half as much at -1.05%.
The graph below shows week-over-week depreciation rates for the entire market, including Cars and Trucks / SUVs / Vans back to January 1, 2020. As you can see, last week represented a sharp change to depreciation rates witnessed in the marketplace. The average deprecation rates slowed dramatically. Canadian Black Book will be closely watching this last full week of June to verify if this is the start of a positive shift in trends for Canadian values.
Segment Highlight – Minivans
At one point, Minivans were a cornerstone of the Canadian car market. Then along came SUV/Crossovers, which promised a greater ‘cool-factor’, some rough-road capability and the inclement weather capability that most vans lacked. Today, the Minivan segment is only about 3% of total sales in Canada and over time that number continues to trend downward. The segment has evolved from a simple bare-bones family hauler to a more luxurious option. Minivans today are very well equipped, comfortable and in many cases available with AWD and many luxury features. Over time, many players in the segment such as Nissan, Ford and GM have abandoned the segment, as they focused more on the development of sport utility products.
The venerable Dodge Grand Caravan, which has been the perennial volume leader in the segment, often capturing more than half of sales, will stop production in Windsor, Ontario in August of this year. The FCA van can trace its roots back to the “Magic Wagon” which in many respects launched the craze of the van as the family hauler. Today, the segment is still dominated by the Dodge Grand Caravan as it winds down production, followed by the Toyota Sienna, Honda Odyssey, Kia Sedona and the Chrysler Pacifica.
Minivans increased in value by 0.10% last week, quite a bit better performance than the other Truck/SUV/Crossover segments which saw a 0.30% decline on average. In the last month, Minivans had a total of 2.69% in weekly declines as compared to the overall truck segments, which are down almost the identical amount of 2.62%.
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 June of 2017. Since that time three years ago, the retained value (%) of 2-6-year-old Minivans has demonstrated a significant downward trend, showing a decline of almost 19 index points. Recently, as of our May index, the segment has lost about 12 points in the last twelve months. A significant decline especially when one considers that the market had been quite strong during that period, at least until the arrival of the pandemic.
When we look at how vehicles within the segment perform with regards to actual retained value performance after 48 months, it is the Honda Odyssey and the Toyota Sienna that dominate. After four years, the Sienna still holds about 58% of its value, compared to the segment average which is 46%. For 2019, the Toyota brought home CBB’s Best Retained Value award, repeating the win from 2018. In 2017, the Honda Odyssey and Toyota Sienna tied for the victory, a rare occurrence for our awards historically.
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. June has some time to go before the results are tallied and a smaller decline looks to be the direction the market is taking.
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.
This past week when we reviewed listing prices across Canada, our team still does not see a large change in average asking prices. This continues to surprise, as there has been a large decline in wholesale prices over the same period. 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 approximately 1.4% The orange line in the graphic below represents the 28-day moving average (MA 28) for the market and the green line the 14-day (MA 14) moving average.
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.
We have heard from some very enthusiastic retailers this month. Some expect that June 2020 could be better than June 2019 from a sales volume perspective.
We do still have some reservations that much of the demand in the market is pent-up and not the natural pace for this COVID-19 influenced marketplace. With auto retail in Canada shut down from March until early May, for many this has pushed demand to later in the year, which is what we believe we are seeing now.
The tremendous disruption to new vehicle production will continue to be a factor, as retailers who are having strong sales in June, may struggle to source some new units for July.
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. At this point it appears that our Scenario A is the more probable one, unless of course there is a large resurgence of the virus in the coming months.
USED VEHICLE SUPPLY PROJECTIONS
Canadian Black Book maintains our projection of dramatically higher 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 has postponed many units coming back to market. They will still be arriving for sale, albeit later than originally planned. • Increased repossessions due to deteriorating economic conditions • 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 reenter 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.
Given the economic situation Canada is facing, it is regrettable that default rates on vehicle leases and loans will rise. Earlier this month, TransUnion reported in their TransUnion Industry Insights Summary for the 1st Quarter 2020, that auto delinquencies had risen to 1.83% which is a gain of about 4.6% compared to the same quarter last year. This number most likely understates the magnitude of the situation, as the month of March was still very early to understand the impact of COVID-19 in Canada. These repossessions will push more vehicles to auction and the secondary market, increasing the supply of vehicles available for sale.