A warning for Australia from the US car market, where even though September saw a solid sales month (as did Australia’s thanks to another stellar month for Tesla) – new and used car prices are now weakening and analysts think there’s a fall coming that will wipe out the premiums consumers have been paying for the past two and a bit years.
US new vehicle sales fell slightly in the third quarter, even though some automakers reported improvement in September. But there are warning signs consumers’ appetite for expensive new cars, trucks and SUVs may be waning.
There will be no soft impact for the US used car market and will that crunch be repeated in other countries where firstly the pandemic and then a shortage of new cars and components saw used car prices soar in 2020 and through most of 2021?
Prices for new and used vehicles have been a crucial driver of inflation in the past two years as shortages of components, staff and Covid pandemics have restricted supply at a time of heavy demand from cashed up buyers with the freedom to shop and buy from home in the lockdowns.
But like all booms that happen unchecked, there is now a reckoning and used car prices are now falling, especially in the US and there is no reason to think that will not be repeated, especially in 2023.
The US Manheim Used Vehicle Value index, which measures the wholesale car market, fell 2.3% in September. The used car component of the US consumer price index has also fallen 4% in August and more again in September. In fact, the index in September fell to a year low and was 11% lower than it was in January of this year.
Carmax, America’s big listed said last month that second quarter, retail unit sales fell a steep 8.3% from the second quarter of 2021 on a like-for-like basis (the retailing measure of the same number of stores or outlets open in both periods).
CarMax blamed the shortfall on the higher day-to-day expenses consumers are dealing with and their growing wariness of buying big-ticket items. The company said sales results deteriorated markedly as the quarter progressed.
Within its wholesale segment, CarMax noted a depreciation per vehicle of $US2,500. That drop was so fast it resembled falls in 2008-09. Investors were so surprised that they sold off CarMax shares so fast that they crashed by nearly one-quarter, losing $US3 billion in around a day.
Still, US used vehicles are hardly cheap. The Manheim index is still more than 40% above its level pre pandemic and CarMax noted that even if whole depreciation per vehicle hit $US2,500, appreciation in 2021 was $US7,500, so there’s still a lot of fat left in prices.
Car retailers face losses on used cars from buying cars in the market sold later at a markdown. That especially applies to used vehicles in a boom. And many customers financed their purchases with credit from dealers like CarMax which said in its quarterly commentary that the cost of its loans is now 9%.
If jobs crater (as the big drop in US August vacancies suggests they may well start doing), there will be a rise in loan losses as customers can no longer service their loans.
But there is one bright spot – used EVs such as Teslas are maintaining price premiums on conventionally-powered cars because of the still high cost of petrol.
The premium earlier in the year in the US when petrol prices were above $US4 a gallon and rising was up to 20%. CBS News reported in March that the prices of used Teslas rose 6% in two weeks.
That has cooled but the premium is still there and if OPEC+ manage to boost oil prices with its latest production cut and petrol prices rise again, the second-hand versions of Elon Musk’s vehicles and other EVs will continue to sell for premium prices.
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Listed car companies here include Eagers Automotive and Peter Warren. Eclipx and McMillan Shakespeare are also involved through novated leases and salary packaging deals.
The rise in used car prices turned out to be a big positive for Eclipx in its last financial results in May.
In fact in its May results, Eclipx was confident enough to predict that the 30% used car premium it had seen in the past year, would last until 2023.
The data from America suggests that premium is falling with rising interest rates a growing concern and growing fears of job losses and a slowing economy in 2023.
CarMax’s 9% finance rate is 50% more expensive than a host of leasing rates from specialist finance companies and banks.
In Australia, car finance remains OK with the Australian Bureau of Statistics revealing this week that finance for the purchase of road vehicles rose 17.7% in August, after a rise of 5.2% in July.
