• Canadian wholesale used vehicle prices strengthened again this past week. Cars were up by 0.05% and Trucks rose by 0.19%, these are much smaller increases as compared to recent weeks. • U.S. wholesale used vehicle prices this past week saw both Trucks and Cars decline in value. Car wholesale prices fell by 0.26% and Trucks fell by 0.07% • Market feedback remains consistent this week suggesting used vehicle supply levels remain tight, while demand for used vehicles, for both export and domestic sale, remains strong. • The average days to turn for used car inventory ended the week at a 14-day moving average of 53 days, which is much lower than typical industry levels. • The Canadian dollar has been trending downward this month, with a loss in value of 1% so far in September. Over the long term, continued losses will make Canadian used vehicles more desirable to acquire for export to the U.S. • With the strong rebound in new car sales for August and September, there is now growing concern in the market regarding expected shortages for new cars as many OEM’s saw production interruptions and also elected to scale back orders to try to match expected softer demand.
This past week, we continued to see stronger wholesale values here in Canada. The market remains in a rebound phase after the massive decline of over 7% in values seen in the spring. Both Car and Truck segments saw positive results for the week with Car values growing slightly stronger by 0.05% and trucks showing a more robust 0.19% gain. This is contrary to the trend in the U.S. market last week where there were declines in values for both segment types.
The common theme in the market continues to be all about product shortages and generally much tighter inventory than usual for this time of year. The shortage of stock, as well as a strong demand for used vehicles, is helping to keep prices elevated. The normal fluctuations of seasonal demand have been greatly disrupted this year, making the retailer’s job of determining appropriate stock levels and product mix even more challenging.
The large-scale upheaval of global production continues to have an impact here in Canada. With sales rebounding over the last two months and as the market begins the changeover from 2020 to 2021 model years, Canadian Black Book is expecting that product shortages will become a greater concern in the coming months. Shortages may drive some consumers to purchase something other than their first choice, perhaps switching products or brands. In some cases, a thrifty consumer may contemplate switching to a lightly used versus a new model. With so many manufacturers offering comprehensive Certified Pre-owned (CPO) programs, new car shortages could be an unexpected opportunity for growth in CPO sales. For several vehicle models, their 2021 launch may in some cases be three to four months after the original expected introduction date.
Adding to concerns about shortages of product, are the current negotiations between UNIFOR, the union representing over 19,000 Canadian auto workers, and GM, Ford and Fiat-Chrysler. The current contracts expire on Monday September 21, 2020, putting the union in the position to strike. UNIFOR announced this past week that the primary negotiation target is Ford of Canada’s Oakville plant. Strike action not only risks shutting down assembly of Canadian made vehicles, but also automotive component parts made here in Canada. The main issue remains job security, specifically the allocation of production for new products to Canadian plants.
Our team continues to watch with great interest the effect of the pandemic on Canadians’ relationship with work and specifically the commuting habits of drivers. According to Statistics Canada, in 2016, 12.6 million Canadians commuted to work by car. The average distance commuted was 8.7 kilometers. This roughly equates to some 27 billion kilometers of commuting, all of which translates into wear and tear on cars and deprecation of vehicles values. This usage is the force that lowers wholesale values, along with general vehicle age.
This past week, we noted that General Motors is asking staff working remotely to continue to do so until June of 2021. At the end of July, Royal Bank and TD Bank announced that most of their staff will continue to work at home until 2021. Many other employers have made similar statements in recent months. In the August 2020 labour force study, Statistics Canada reported that 75% of the 3.4 million Canadians working at home at the start of the crisis were still doing so. By our estimate, this equates to approximately 6 billion fewer kilometers driven, if the situation was to persist for a full 12 months. This compounds the large number of people who are newly unemployed and not driving at all. The conclusion here is that typical mileage seen on cars is going to drop as a result of the pandemic, therefore improving the quality of the Canadian fleet and allowing many consumers to postpone replacement of their vehicle due to lower mileage. The higher quality fleet, all things being equal, means that prices will be marginally higher for comparable 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.
• The wholesale market has adjusted to the health and safety concerns that remain and the marketplace continues to run primarily online-only. • The major auctions do allow for potential buyers to browse the lot for vehicles in upcoming sales, but bidding is done online. • It is uncertain as to when physical auctions with vehicles in the lanes will return.
In September, our analyst team has noted that auction volumes remain strong. We have noted that the quality of vehicles in many cases has decreased. Specifically, this past week our team noted larger numbers of higher mileage vehicles, older model years and vehicles with corrosion issues.
The feedback continues to be that used vehicles are in tight supply. The number of days to turn for vehicles listed for sale by retailers has fallen again for the second week of September. The national average for last week is now 46 days, the rolling average for the past 14 days is 53. To put that number in perspective, the national number was 75 days to turn, back at the end of May.
The shortage in used product, which may seem surprising to many, is a result of what has gone on in the market this year. When lockdown actions first halted much of the industry in Canada, this created greatly reduced numbers of trade-ins to feed auctions and for retailers to sell. Tens of thousands of lease returns, a very large source of used vehicle supply, were extended, postponing the return to market of these vehicles. At the same time, the number of repossessions in the market also shrunk the number of vehicles available for sale at wholesale.
Our team expects drastically increased volume of repossessions over the duration of 2020. Much higher than expected levels of unemployment along with the looming closures of many businesses in Canada are expected to result in more repossessions. This increased supply, at a time when demand has an uncertain future, will drive prices downwards before a lasting recovery can take place.
Auction Sales Rate
The sales success rates in Canadian auctions remained lower this past week, versus what we have observed in recent months when rates were exceptionally high. Last week, we noted a high sales rate of 86% in one auction lane and a low of 25% in another. On average, our observed sales rate last week was approximately 60%; much lower than rates we have been seeing.
We continue to note large numbers of prospective buyers online, however, prices are starting to become more static with fewer rapid increases.
CURRENT WHOLESALE PRICE TRENDS
For the second week of September, Canadian Black Book noted that both the Car segments and the Truck segments (which includes SUV, Crossovers, Pickups and Vans) again increased in wholesale value. The increases for the week remain much smaller compared to large increases we have seen during the value rebound over in the past two months. This week is the fifth week in a row of increased wholesale values for Cars, and the eighth consecutive week of wholesale value gains for the Truck segments.
For the week of September 7, Canadian Black Book concluded that the nine Car segments increased in wholesale price by an average of 0.05%. This compares to a much larger increase of 0.14% the week prior and a record 0.35% increase from three weeks ago. The average increase over the past four weeks is now 0.16%. Wholesale price trend for cars remains positive, yet gains have weakened in recent weeks.
Six of the nine segments saw growth for the week. The largest increase was for Near Luxury Car at 0.49%. The second strongest segment for value increases was the Luxury Car segment at 0.12%. The Prestige Luxury Car and Full-Size Car segments tied at a marginal gain of 0.09% for the week.
Three segments declined, with the largest drop seen in Sporty Cars at -0.43%. Smaller declines were experienced by Subcompact Car at -0.12% and Compact Car with -0.08%.
The Truck segments also increased in value for the week and by a larger margin compared to Cars. For the week of September 7, the thirteen Truck segments rose on average by 0.19%, a larger gain than last week’s 0.10% increase.
The largest bump in value was for the Full-Size Crossover/SUV at 0.54%, followed closely by Sub-Compact Luxury Crossover/SUV at 0.52% and Sub-Compact Crossover/SUV with 0.50%, and a tie between Sub-Compact Crossover/SUV and Minivans both with 0.50%. These are large gains across three key segments.
Just three segments saw declines last week. The largest decrease in value was seen in the Full-Size Luxury Crossover/SUV segment at -0.17%. The Compact Luxury Crossover/SUV segment followed with a slight decrease of -0.05%, and the Full-Size Vans posted a small decline of -0.03%
Presented in our chart below is the output from one of our proprietary market analysis tools, Visual Analytics.
In the graph (Canada – Weighted % Change in Value by Segment for 2- to 8-year-old models), we graphically present the trended changes in wholesale value week-over-week. The data set is based on our team’s review of data 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. The data presented in the graph goes back to March of 2019 to allow the reader to appreciate the weekly value change trends over a longer period and before the pandemic crisis.
When examining the graph, one can see the normal trend was a steady stream of weekly declines, starting in June of 2019, far in advance of COVID-19. Then 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 when so many areas in Canada were under mandatory shutdown orders and many others saw voluntary closures of dealerships.
With the first full week of September completed, the market continues to remain on the path of positive increases, albeit smaller ones than we have seen during this current market recovery phase. We expect that the next phase will see additional value declines again before values finally do stabilize in late 2020 and early 2021.
CANADA AND USA MARKET COMPARISON
For the first full week of September, the U.S. market saw wholesale value changes swing negative for both Cars and Trucks. Trucks were down slightly at -0.07%, however Cars were down by -0.26%. The Car value decline follows a -0.22% from the week before. The decline in Truck values ends a fifteen-week winning streak of value gains.
The Canadian dollar has started to weaken this month. A loss of $0.008 or 1% has been noted in trading from September 1 to this past Friday, as reported by the Bank of Canada. The dollar remains a key factor in determining vehicle value trends in Canada due to the large number of units exported from Canada to the U.S. each year. A weaker dollar is helpful to drive stronger U.S. demand for Canadian used cars.
Through the present crisis, the U.S. market has responded more quickly and with greater magnitude of change than seen in Canada. This has been a consistent theme. With the U.S. market now showing softening values for both Cars and Trucks this past week, it will be interesting to see if the Canadian market follows. Part of the present concern in the U.S. is the level of social assistance payments to those affected by the pandemic. With many of those programs winding down and no replacements yet in place, that is expected to have a cooling effect on the auto market, and place downward pressure on wholesale prices.
USED WHOLESALE PRICE PROJECTIONS
Wholesale Price Impact Under the Most-Likely Economic Scenario
Wholesale prices in Canada continued to strengthen this past week, with considerably smaller gains. To recap, Canadian wholesale values halted their sharp decline beginning in June. That inflection point signaled the start of a significant rise in values, as has been the case in the U.S. market.
Looking back to previous months, wholesale prices fell on average 0.99% in March, 3.58% in April, just over 3% for May, and June was flat. In July, values rose by a remarkable 3.18%, or 3.20 CBB Index points. August saw a new record gain of 3.73 Index points or 3.60%. This is the largest increase in the history of Canadian Black Book’s Value Retention Index which commenced tracking the market in January of 2005. The CBB Index is now 0.19 points higher than one year ago, and 0.83 points lower than January of 2020.
Canadian Black Book’s outlook reflects a new economic reality – our team expects that projected values will continue to stay below pre-COVID-19 projections over the next two years.
Short-Term Outlook (Fall/Winter of 2020)
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.
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 fall/ winter, 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. The differentiating factor between CBB’s Most Likely Scenario and the Severe Recession Scenario is our success at combating the spread of the virus. If a particularly large subsequent wave of COVID-19, or waves, were to push parts of the economy into lockdown mode, the recession would deepen further.
We enter September with a negative trend in listing prices, similar to what has been observed since early June of this year. The trend in retail asking prices has been quite different compared to those in the wholesale market, where values have been strengthening. The conclusion from the data is that Canadian retailers’ used vehicle margins are still under pressure and profit levels continue to be squeezed during the crisis. The 14-day moving average for retail asking prices, shown by the green line in the graph below, has fallen by 3.2%, since the first week of June’s peak. In the same period, wholesale prices have increased by over 6%, thereby compressing margins by over 9%. The total decline in price is just over $900.
During this same period of time CBB has noted, as mentioned, that days to turn for inventory remain more quickly, however at much lower gross profit levels.
Below is Canadian Black Book’s analysis of vehicles listed for sale by retailers in Canada. It does not include vehicles offered for sale by their owners. The noted asking prices do not necessarily relate directly to the final transaction price, as retailers do have flexibility on each deal. Market feedback remains that supply of good used vehicles is coming up short. As supply grows in the coming months, we expect both wholesale prices and active listing prices will fall.
• New light vehicle sales for August 2020, as estimated by Desrosiers Automotive Consultants, were down 8.9% as compared to the same period last year. • This is significantly lower than July numbers, where sales were down by a smaller margin of 4.9% for the month. • The August result more accurately illustrates the natural level of vehicle demand during this uncertain time. As we get further along in the year there is less “pent up demand” reflected in the sales numbers. With dealerships closed in large numbers nationally, early in the pandemic, some initial results after reopening were acknowledged to include increased demand deferred from earlier in the spring. • 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.
New Vehicles Sales Outlook
Our New Sales Outlook remains unchanged from our last update. We 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. New sales were down 34% during the first six 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, and the sales results so far, this now very unlikely to occur in 2020. In the longer-term, we expect new sales volume to return to pre-COVID-19 levels within five years. At this point in time, based on the progress in containing the virus in Canada, it appears that our Scenario A is the more probable one, unless there is a large resurgence of the virus in the coming months that will lead to significant lockdown measures being implemented again.
USED VEHICLE SUPPLY PROJECTIONS
Canadian Black Book maintains our projection of higher used vehicle supply in the wholesale marketplace for the fall months due to several factors: • Our market metrics show that used inventory is turning at a 14 day moving average of 53 days this past week, up one day from the previous week, yet down considerably from the 73 days observed in early June. • In the past few weeks, the inventory churn rate trend has stabilized, however it remains lower than historical norms. • 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 to be temporary, with more supply expected in the coming months, especially as lease returns and repossessions begin to happen in greater numbers. • The delayed lease returns, resulting from lease term extensions offered by OEMs, are now coming back to market. • De-fleeting by rental car companies due to a lack of consumer demand in the travel sector will continue. However, it is expected that these firms will try to do so slowly and strategically to avoid flooding the market and thereby reducing their own proceeds at wholesale auction. • In Canada, 2020 and 2021 were already big years for lease maturity volumes, with falling values and economic uncertainty; this may push lease return rates up due to fewer buyouts by lease holders. • There is the expectation of a reduction in the size of corporate fleets due to smaller operations and the desire to free up cash.
Short Term Lease Return Projections
At the beginning of 2020, lease maturities were projected to hit a record volume of more than 400,000 units for the year. Once the pandemic was underway and most manufacturing stopped, OEMs worked to facilitate lease extensions in order to push returns further into 2020, when they would be able to reliably provide replacement vehicles. Those vehicles have started to come back to be remarketed well into the fall. As a result, we project at least 60% more units will arrive in the second part of 2020 (compared to the pre-COVID-19 estimates) due to a slowdown in sales in March/April/May, along with expected late turn-ins of the lease extensions.
Rental Unit Returns
The travel industry remains hard hit by the COVID-19 crisis. Air travel for international visitors to Canada is down by 95% in 2020. With the Canada-USA border closed, at least until later this month, the number of travelers from our closest neighbour remains sharply down as well. Statistics Canada recently reported that the number of passengers being carried on aircraft in Canada hit its lowest level in 40 years.
Rental car companies have seen an increase in what they refer to as the “home city” business, which are rentals by local residents. These rentals can be used to replace a car that is in the shop for repair work or to travel within Canada. It is also expected that some uptick in rentals can be from previous ride sharing or transit users that are now avoiding that means of transport.
In a typical year in Canada, 200,000 vehicles are sold to rental car firms, or just over 10% of the total volume in the industry. These vehicles remain in operation for 12 to 18 months until they re-enter the market as used vehicles. The reduction in rental cars could very well be in excess of 100,000 units for 2020, which alone will account for more than 5% of the decline in the industry.
With such a significant reduction in business, the market will not have remarketed rental car units as a source of lightly used vehicles in 2021 and 2022 to the same degree as previous years.
Increased levels of repossession activity are expected to be one of many unpleasant side effects of the COVID-19 crisis. The positive side of repos are that they do create used vehicle supply. So far this year, there has not yet been a large spike in repossession activity, although many vehicles were voluntarily returned when payment could not be made.
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. As a result, many consumers who will default on their lease or loan will do so later in the year due to the deferment. The various government assistance options have also been very helpful for consumers to make car payments if they lost their jobs during the crisis. This assistance has kept the actual number of repos lower and prevented an increase in supply in the wholesale market. Should the Federal government scale back emergency assistance programs, it would be expected to cause an increase in repossessions. Practically speaking, the time from late March until early May made repos exceedingly difficult and, in some cases, unsafe given the virus outbreak. It is expected that, in thenfall, there will be an increase in repossessions.
Professionals in the repossession business have been preparing their operations based on this expectation, and in some cases, hiring and training more staff to meet the expected demand in the latter part of 2020.
About Canadian Black Book
For almost 60 years, Canadian Black Book has been the trusted and unbiased Canadian automotive industry source for vehicle values. Today the company has grown into a leading data provider of vehicle valuations, residual value forecast solutions and VIN decoding. Canadian Black Book tools and information are considered ‘The Authority’ for vehicle values not only by car dealers and manufacturers, but also the leasing, finance, insurance and wholesale sectors. In 2020, Canadian Black Book is bringing to market its Enhance Vehicle Matching (EVM) solution, which will allow the industry to more consistently decode 17 digit VINs down to a specific trim package, allowing a more precise vehicle valuation.
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