Used-car retention values reach all-time high

Brian Murphy, Canadian Black Book. Photo courtesy of company.
MARKHAM, Ontario  - 

The retention value of 4-year-old vehicles has reached an all-time high for the second year in a row, according to the 2018 edition of the Canadian Black Book Retained Value Awards released this week.

Four-year-old vehicles are retaining 53 percent of their original MSRP, Canadian Black Book said, beating the record level (51 percent) from 2017.

Overall brand winners include Toyota (for both the car and truck/crossover/SUV categories) and Porsche, which was tops in luxury. 

Of note among the model winners is the Jeep Wrangler, whose 2014 edition retained 91 percent of MSRP, an all-time high by a wide margin. The Wrangler has won for eight straight years in a row. 

These factors push retention levels 

So what’s driving such high overall retention value of used cars?

“Good question. It’s a lot of things. It’s never just one factor,” CBB’s Brian Murphy said in a phone interview. “Generally speaking, the economy’s doing quite well so the demand for new cars and used cars is quite strong.”

Another driver is the volume of used vehicles being exported from Canada to the U.S., said Murphy, who is CBB’s vice president of research and editorial.

“There’s some additional profits to be made by buying a car that’s typically priced lower in Canada and then shipping it to the United States,” he said.

“Those two things are probably the main drivers, and then I think the third factor you can’t overlook is really that values have just been going up, up, up for the last eight years, so it’s really just sort of the trend, if you will,” Murphy said. “Back eight years ago was when things were in recovery mode from a rather rough patch of economic times.”

In fact, last month was the first January to show a month-over-month drop in CBB’s Used Vehicle Retention Index in nine years. And values were still up 3-percent year-over-year in January, which the company said was “not surprising given the overall strong values over the course (of) 2017.”

That speaks to Murphy’s insight on values consistently climbing.  

Some scaling down expected

How long will the incline last, though? It may be that the industry is reaching a “turning point,” despite what was a banner 2017, CBB president Brad Rome said in a news release.

“What a great year for retained values,” said Rome. “That said, the feeling is that we are getting close to the turning point where values are going to begin to retreat. Market conditions, most notably the increase in supply in the U.S. and Canada, is expected to put downward pressure on prices moving forward.”

Specifically, starting this year and through “the next three or four years” there could be some scaling back in used-car values, Murphy said.

The extent to which used-car values “retreat” will be influenced by the general movement in the Canadian economy as well as the “relationship” between the U.S. and Canadian dollars.

Also driving CBB’s expectations for some softening is the projected off-lease supply hike, similar to what has been seen in the U.S., Murphy said.

He expects off-lease numbers to climb significantly in coming years.

From 2013 through 2017, there was an average of roughly 225,000 lease returns each year in Canada, Murphy said. However, the average for the 2019-2021 time frame is expected to be 400,000 lease returns annually.

And with the “math” on off-lease volumes for the U.S. expected to be similar proportionately (albeit on much larger numbers),  U.S. prices could decrease, too, he said.

“And that kind of takes away the incentive to bring a car in from Canada if the U.S. prices are falling, as well,” Murphy said.

Supply recovery

In terms of supply, the Canadian used-car market is still in the early stages of the volume recovery, with that expected to ramp up late this year or early next year, Murphy said.

“It’s good news for consumers in terms of availability of product and for dealers’ availability of product,” he said.  

However, “if you’re remarketing a car, you can expect that the proceeds you get at auction in the future won’t necessarily be as generous as you’ve got in the past, all things being equal,” Murphy said.

More insight next month

For more analysis from Murphy on the Canadian used-car market, be sure to catch his presentation at the , which is being held March 27 and March 28 at The Westin Harbour Castle in Toronto. 

Murphy’s will dissect the 10 most important elements of the used-car industry, touching on “what these elements mean today and for the future of wholesale vehicle values and forecasted residual values,” according to a description of his session.

 

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