What’s really happening with used car prices
In this blog, I wanted to offer my assessment of the current health of the used car market based on a broad and complete view of the retail market, and answer some of the questions around used car prices that we know are front of mind for many retailers right now.
How is the current health of the used car market?
Before I dig into the latest pricing data, it’s worth first looking at the broader health of the used car market. To assess this, we can look at our proxy for sales volumes in November, which is based on the volume of stock removed from our marketplace, as well as compare the speed in which used cars are leaving retailers’ forecourts. This gives us a good sense of how the market is performing today in the context of previous years.
We can see that this November, sales volumes were up over 5% compared to last year, which is a good indication that the market is still holding reasonably strong. The other key indicator is the speed of sale, which as you can see in the below chart, the performance throughout 2023 have been strong relative to previous years. Last month, we saw this running at an average of 31 days which is in line with what we would expect for this time of year.
When you dig into the data at a more granular level, you can see there’s a lot of variability in the market. The bars in the graph below show the change in number of days to sell compared 2022 (above the line means selling slower and below the line is selling faster). The light blue dots show our Market Health indicator, which is the movement in the ratio of supply and demand from last year to this.
The first thing to note is that there are very different trends in speed of sale relative to last year; we’re seeing marginal movements in diesel in the younger age cohorts as Market Health is positive, but largely it’s the oldest age bands that are slowing, with lower Market Health compared to 2022. We’re seeing strong performances where Market Health improvements are the highest, such as 1–5-year-old electric vehicles, which are selling much faster, and mid aged stock for almost all fuel types, where there is currently short supply as a result of restricted new car volumes from 2020 through the pandemic.
Our key take-out from this data, is that the used car market is by no means poor but there will be a lot of variability when you get down to individual vehicles depending on those supply and demand dynamics at retail. Today more than ever, this should be key considerations when setting your pricing strategy for each vehicle.
Are retail prices and trade prices out of sync?
It’s been widely reported that used car prices have fallen over recent months, but as you can see from the data below, which is based on trends in like-for-like movements, the trends in the trade market and the retail market have been notably different in the past few months.
We saw growth in prices every month in 2022 at trade and at retail but the strength of the growth held a lot longer in retail than it did in the trade. In 2023 we saw continued growth at trade up to around July and then prices started to drop YoY and in November we saw the largest drop for some time. If we look at retail however we can see that prices have been up YoY through to August, flat in September and the first drop was October. November is trending down by more, but crucially, significantly less than trade.
This means retailers are in an advantageous position, as they can see the different dynamics between trade and retail. The supply (stock coming into auctions for example), and demand will determine the strength and movements in those prices. Our data offers key insights such as Market Health, supply and demand trends, and pricing movements for vehicles that are in the retail market being offered by retailers and bought by consumers. This data is based on over 800,000 daily observations of vehicles from over 13,000 retailers. This supply and demand dynamic is effectively the best guide to help understand the values of vehicles in a retail market.
It may seem like an obvious point, but it’s worth remembering that consumers don’t know what retailers are paying at wholesale. They have a view of what vehicles are valued at, through our marketplace for example, which is their guide for what is a fair price to pay. If retailers use retail values when sourcing stock, they can quite easily work out the profit opportunity in each vehicle in the trade based on their cost base.
Again, looking at the data in more granular detail, we can see the opportunity this current disparity in trade and retail values presents. EVs have experienced the highest drops dues to a rapid increase in supply, but it’s the differences in trade and retail for ICE vehicles that’s interesting and where there look to be some great opportunities. This is a good example of the potential profit available when considering what consumers believe to be a market price.
How does today’s market compare with last year?
As always context is important, and so it’s worth looking at how today’s market compares with the same time last year. Here you can see the price movements from October to November for trade in white and retail in blue. The red bars show the Market Health of these vehicles grouped up by fuel type. Clearly a tougher market in November 2022 relative to November 2021 and quite variable movements in values of vehicles. The backdrop to this was the change in prime minister and Liz Truss’ disastrous Mini Budget that caused a rapid increase in inflation and interest rates, and subsequent concern for consumers.
If we now look at the same data for this year, it’s telling a very different story. The health of the market in 2023 is up compared to last year for almost all fuel types, clearly within these groupings there will be some vehicles up by more than this and potentially some not seeing the positivity, which is why it’s so important to go deeper into vehicle level metrics.
What’s interesting to note here, is that despite the stronger market the MoM trade valuations are down between 7% and 4%. Cars relatively cheaper across the board to source. In contrast, retail valuations are down to a much lower degree.
How are retailers responding to these changes?
Despite this imbalance, and the fact the backdrop today is nothing like last year’s, we are seeing retailers drop their prices compared to previous months, even though the market isn’t calling for this approach. This is highlighted by the data below, which shows the day one price position of vehicles entering our marketplace relative to the retail valuations / their retail market value, split by fuel type and age of vehicle. Compared to last year, it shows that in 2023 entry prices are consistently below the current market averages across all cohorts of vehicles. Where we’re seeing the most pressure from increased supply, such as ‘nearly new’ EVs aged up to a year old, they’re entering 2% lower than the average prices of the stock already in the market.
Pricing new stock to market lower than in-market stock will be a drag on the valuations of vehicles and what we’re seeing here is a reaction from those already in market. The chart on the left shows the % of stock that is repriced in the month. The blue line is 2022 and the red one is 2023.
Last year in November we were seeing about 85% of cars re-priced and this year this is 105% which means some cars are being repriced more than once in the month. The chart to the right shows the price change as a % of the previous price; we can see that there’s not only more changes being made, but they’re being adjusted down by a larger amount - about 1.5% last year and closer to 2% this year. As the retail market doesn’t offer any indication that this is required, it appears to be a reaction to what’s happened in wholesale values, which in turn will create a similar impact in the retail market.
To conclude, it’s worth highlighting specific examples of the nuance in the market, and the value of using broader retail data when assessing pricing decisions. In this example, an Audi Q2 aged 3-5 year-old, shows demand growth is outpacing supply growth, which makes for a much stronger Market Health position. This creates what we would call a “sellers’ market” and that should determine pricing strategy on entry. The market value is £15,243 and by utilising our Trended Valuations data, it’s expected in 30 days to decline by 0.2% due to seasonality. However, this vehicle is expected to benefit from the Market Health and hold strong at 60 days with some improvements in value at 90 days. The approach in this example would suggest re-pricing is not needed and it just creates margin erosion.
I realise I’ve used a lot more data and visuals in this blog than normal, but hopefully this detail view of our market context and observations on values at trade and retail, as well as observations on current retail pricing activity, helps highlight what’s currently playing out in the market. More importantly, I hope it illustrates the variation and hence need to use as much data as possible to set vehicle-level pricing strategies and see those strong margin opportunities when sourcing by using a retail back pricing approach.
We discussed this topic in detail, along with guests James Kurd, COO of Eden Motor Group, and James McConville, director of Solo Car Sales, in a used car pricing webinar, at the beginning of this month. Along with myself and Ian Plummer, they discussed the potential impact the fall in wholesale prices are having on the industry, how retailers should think about responding and whether we should still be doing things by the book. If you missed it live, you can catch up on the webinar here: https://bit.ly/3uuHqb8