RICHMOND HILL, Ontario -

While a bevy of influences in the Canadian vehicle market help shape a vehicle’s residual value, used units that are either certified pre-owned or have valid warranties from the OEM typically fetch a stronger value, according to recent analysis from Canadian auto analyst Dennis DesRosiers.

As one might expect, a strong warranty or factory certification leads to a stronger residual.

“Warranties provide customer reassurance — all-important in the potentially trouble-fraught world of used vehicles,” he shared in the latest Observations report. “Consumers seek the ‘peace-of-mind’ associated with vehicle warranties and place value on this factor.

“As such, used vehicles with valid factory warranties or certified pre-owned designation generally command higher prices than equivalent vehicles without,” DesRosiers continued.

Warranties and certification were just some of several major influences on residual value strength that DesRosiers tackled as he examined what leads to depreciation, as well as the variance that exists between similar models.

More specifically, the 10 market influences on value retention that he examined were as follows:

—Original MSRP
—New-vehicle sales volumes
—Fleet sales volume
—Off-lease supply
—Pricing incentives on comparable new models
—Vehicle longevity, quality (actual and perceived)
—Safety recalls
—Non-safety recalls
—Vehicle warranty
—Consumer trends

One of the more interesting findings was that of safety recalls.

These, of course, have dominated the automotive landscape in Canada and beyond as of late. While they certainly generate headlines and often create short-term trepidation among auto shoppers, do they actually harm residuals?

In what may be a surprise to some, DesRosiers suggests that safety recalls don’t actually don’t put too much downward pressure on residuals

In fact, safety recalls can often lift a vehicle’s value.

“Indeed, the opposite phenomenon usually occurs as consumer perception of a vehicle’s quality may improve after the recall,” DesRosiers explained. “Flaws corrected, the model may be considered a better bet than before.

“This adds to the peace-of-mind dynamic associated with purchasing a used vehicle and is closely related to other quality factors such as vehicle longevity and perceived value,” he continued. “In addition, with a safety recall, many existing consumers perceive their vehicle to have lost value and do not put it up for sale.”

Thus, supply goes does and resale prices for similar units goes up, he said.

“It may seem counter-intuitive, but those wishing to get a better price for their used vehicle should actually cheer loudly when a recall campaign is announced,” DesRosiers commented.

He also delved into each of the factors in more detail

Original MSRP

When looking at it fundamentally, residuals are essentially a percentage of what the original MSRP was, DesRosiers said. How much the selling price of a current vehicle goes up or down certainly affects the residual of a used version of that unit, DesRosiers suggested.

“For instance, if a vehicle manufacturer increases the MSRP of a particular model, the pricing differential increases between the new vehicle and its used vehicle equivalent,” he explained. “Market forces will subsequently raise the price of the used vehicle to balance the pricing differential.”

And vice versa when the MSRP is lowered.

DesRosiers points to this phenomena as one rationale that automakers have for not changing MSRPs in the middle of year. Instead, automakers typically rely on things like incentives.

New-Vehicle Sales Volume

Next up, DesRosiers looked at the role played by new-car sales. Obviously, with greater new-car sales, it means the potential used supply goes up. Changes in new-sales volume affect how many used units are available down the road.

“As supply increases or decreases, market demand for a vehicle will change, thereby influencing used vehicle pricing,” DesRosiers pointed out.

Fleet Sales Volume

Moving along, DesRosiers noted that fleet sales typically comprises around 15 percent of annual Canadian vehicle sales. He stressed that the fleet market has been a fairly steady supplier of used volume but emphasized that fleet units are often sold greatly discounted.

Fleet sales are particularly influential on residuals when commercial buyers are keen on a particular model.

“A flood of nearly-new, well-maintained used vehicles into the used marketplace has the potential to upset the market’s supply balance,” he explained. “For instance, if a daily rental fleet buys a quantity of new vehicles, then resells them after six to 18 months, the appearance of a large cohort of similar vehicles in the used-vehicle marketplace will adversely affect the residual values of all similar cars on offer.”

Off-Lease Supply

Also influential in residual valuation is the volume of end-of-term lease vehicles, he noted, which if large, can have a negative impact on residuals. The inverse is also true, DesRosiers shared. When leasing decreases and off-lease volume subsequently declines after the lease period, residuals often go up.

Pricing Incentives

As mentioned earlier, incentives are quite often used by automakers when they need to adjust their strategy to get a particular vehicle to sell, but want to keep their pricing consistent.

How does it affect residuals? Basically, they shrink the price gap between new and used, meaning residuals are pushed down.

“When a vehicle manufacturer places an incentive on a new vehicle in the form of subvented interest rates, subsidized lease residuals, cash-back discounts or other special offers, it lowers the capital cost of the new vehicle and reduces the pricing differential between the new vehicle and equivalent used vehicle,” DesRosiers explained.

“In short, when the cost of new vehicles drops, so too do the prices of used competitors,” he added.

Vehicle Longevity

Continuing on, DesRosiers looked at how a vehicle’s lifespan impacts its residual. Obviously, a vehicle that lasts longer gives its owner more value. When used-car shoppers are looking to make a purchase, the perceived lifespan of a vehicle is a vital consideration, he noted.

Because of this, stronger perceived longevity typically means stronger value retention.

Quality

Next up, how does a vehicle’s quality — be it perceived or actual — impact how it retains its value? DesRosiers suggested that the quality components of reliability, durability and low repair expenses are key for a lot of consumers when they’re looking for a used car.

“Vehicles with a history of reliability and easy upkeep generally command higher resale prices as consumers place value on a worry-free ownership experience,” he stated. “Conversely, vehicles with relatively high maintenance costs and/or a reputation for poor quality (rumored or deserved) generally suffer lower resale values.”

Non-Safety Recalls

While DesRosiers believes that safety recalls don’t typically harm residuals, what impact does the non-safety variety have?

These often deal with mending reliability and general quality, he pointed out

“Vehicle manufacturers undertake non-safety product bulletins and recalls in order to service their customers and respond to the needs of the marketplace,” DesRosiers added. “Reliability and general quality problems are often dealt with through this window.

“A particular used vehicle that has not had its bulletin items addressed may be priced lower than an up-to-date equivalent,” he shared.

Consumer Trends

Lastly, DesRosiers looked at how consumer trends affect residuals, noting the market can often be fickle as consumer preferences shift.
This, in turn, alters residuals.

“An example of this is the impact that crossovers have had on the market for traditional minivans,” he pointed out. “From a quick ramp-up in the mid-1980s to high volumes in the 1990s and through the early years of the past decade, minivans have fallen from mainstream to niche status.

“In their stead has arrived a raft of medium and large-size crossover vehicles, usurping minivans’ sales territory and fundamentally changing the dynamics of the family vehicle sub-sector,” DesRosiers continued. “As a result, consumer demand for minivans has faltered and residual values of thusly-proportioned vehicles have fallen.”