Used Car Market Outlook For 2020

Following April’s worst UK new car registration monthly results since February 1946, data suggests that the UK economy continues to plunge into a deeper recession than the 2008-09 financial crisis. Forecasts show UK government borrowing is likely to reach £180 billion (7 per cent of GDP) in the current 2020/21 financial year. However, to kick start the economy, it is likely that the economy will need even more government support.

Lockdown is affecting most UK households, high street shops are closed except for essential stores, and many companies continue to struggle to remain in business. Effectively, large parts of the UK economy is on pause. The interconnected nature of the UK economy means everyone is affected by the coronavirus crisis.

The UK Car Market and Coronavirus

For the UK car market, the Coronavirus pandemic has effectively frozen new and used car sales for an undetermined amount of time. The lives we previously knew are on hold. Increasingly, economic forecasts suggest significant negative effects on the economy.

With no prior precedence, world leaders are unsure about the correct lockdown exit strategy. The overriding concern is the balance between the continued risks to life, versus the ongoing economic impact. Here in the UK, it looks likely that the Prime Minister will make an announcement over the weekend of 9/10 May 2020 to ease the lockdown, although the continuation of social distancing measures is likely until a vaccination is developed.

New and used car sales operations are unlikely to resume normal operations. The adoption of social distancing measures, deep cleaning and appointment bookings are likely to become the new norms across the industry. These measures will ensure the safety of staff and customers similar to the measures already witnessed in UK supermarkets. The additional costs to dealerships will impact margins, however they are an essential cost of continued business and will prevent further surges in the spread of COVID-19.

A slow increase in the commencement of new and used car sales will inevitably lead to some frustrations for customers already in a position to make purchases. With the implementation of social distancing measures in car factories added to the weeks of lost production forced by factory closures around the globe, new car supply issues are expected for at least the remainder of this year. However, other customers may now be unable to go ahead with previously planned new or used car purchases, due to changes in financial circumstances.

The value affect

Fewer new car registrations will quickly impact used car supply especially the six and a half year and over age profile, as these form the majority of UK part-exchanges. This reduction will positively affect residual values of older cars as this age profile remains the mainstay of many retail and trade outlets, mainly due to low acquisition costs and positive margin potentials.

Auction data shows that the number of vehicles over six and a half years old has almost doubled over the past ten years. Despite the huge increase in volume, the following graph shows that first time conversion rates have risen. The popularity of cars of this age continues to increase at auction, helped by improvements in build quality increasing the life expectancy of modern cars.

Glass’s predicts that demand will not soften for this age profile in the future, in fact if the UK enters a prolonged period of recession, retail demand could actually increase as consumers look for cheaper used cars to reduce household expenditure.

If the slowdown of the new car market continues for several more months, this will lead to further reductions in supply of this older age profile. Competition at auction will increase to secure this stock and traders may have to focus on buying younger, more expensive stock. This is likely to lead to some outlets reducing stock levels or needing to secure additional funding to maintain current stocking levels.

Used car operators across the UK are hoping that the lockdown will end soon, and the market settles quickly. As with the food supermarkets, a period of readjustment is likely, the winners in the industry will be those who adjust rapidly and return to selling as soon as possible.