As expected, wholesale volume has increased from 2018 to 2019 in Canada, due in part to growth in lease returns.  But interestingly, the increase isn’t yet putting downward pressure on used prices.

According to RVI, the expectation coming into this year was initially much bigger, with respect to growth in wholesale volume.

“We had forecasted about a 16% increase in volume,” reported Brian Murphy, vice president of research and analytics at Canadian Black Book. “Lease return rates are reported to be very low with many brands, so consumers are buying those vehicles up, or they are re-entering the vehicle market in the hands of
many retailers. 

“This helps keep supply from flooding the open auction, and as a result prices remain very strong,” said Murphy.

Tom Kontos, chief economist at KAR Global, noted that while wholesale used-vehicle supply in Canada, which has been tight for several years, has “started to recover, as off-lease volume comes ‘off-bottom,’” dealer consignment volume is down. This makes overall volume growth moderate.

“This is keeping wholesale prices strong, as they have been for several years,” Kontos added.

How strong? According to Josiah Cimino, director, passenger vehicles, at RVI Group, despite increases in supply, prices for 2- to 5-year-old vehicles increased by 1.9% year-over-year as demand remained strong this July.

“The increases in used-vehicle prices is in part due to a steady and maintained low exchange rate (CAD to USD), in addition to strong used-car prices in the U.S., which makes it more favorable for U.S. buyers to import vehicles to the U.S.,” said Cimino.

He calls this sustained low exchange rate “a key driver helping to sustain high used-vehicle retention.” In other words, the higher levels of demand are outpacing the upward trend of available volume.

Compounding this trend is strong used-car prices in the U.S., which “are partially attributable to the impact of the tariffs between the U.S. and Chinese markets.  They are having an inflationary effect on prices in the U.S.,” Cimino said.

The demand from the U.S. market obviously supports strong prices and values in the Canadian market, including stronger residual values for leasing, even though, as Kontos pointed out, U.S. demand for Canadian units is down from peak levels. 

How long can the Canadian auto industry expect this trend to last?

Murphy said, “We expect the export activity to continue as long as the (CAD) dollar does not rise significantly above $0.80.”

Used-vehicle retention outlook strong

On average, through the first seven months of 2019, used-vehicle retention has been higher by approximately 4.5% when compared to 2018 levels for the same period, according to RVI.

As for price trends on a segment basis, used-vehicle retention has improved for compacts and mid-size cars versus a year ago. 

“Despite the industry continuing to move toward more SUV models instead of traditional sedans, demand for these economical and practical vehicles remains steady,” said Cimino. Year-over-year, used-vehicle retention has increased by approximately 5.1% for compact cars, and 7.5% for midsize cars, according
to RVI.

And Canadian Black Book’s monthly Retained Value Index, for 2- to 6-year-old vehicles has seen month after month of record setting price levels, said Murphy.

“Industry-wide prices compared to five years ago are 13% higher today,” according to CBB data. Notable year-over-year segment movement data from CBB shared in early September includes compact car prices (up 8.9%), midsize car prices (up 5.6%) and subcompacts (up 7.7%).

A trend of note within used-vehicle price retention involves SUV volumes, which have increased as of late after tightening in recent years due to high demand and low lease return rates. Prices, interestingly, are still on the way up, but not as much as other segments.

Cimino noted, according to RVI data, “From July 2018 to July 2019, SUV prices (luxury and mainstream) increased by 0.8%; under the market average of 1.9% overall.”

But we may see prices spike once again, since demand from American buyers across the border is being compounded by declining gas rates in Canada, fueling renewed consumer interest.

So, what can 2019 used-price retention trends tell us about used supply in Canada?

Cimino said: “Despite increasing levels of off-lease supply, sustained low exchange rates coupled with a strong U.S. economy, drives higher demand for used vehicles. The exchange rate, along with the stability of the US economy, remain key variables to monitor.”

Looking forward: Potential pre-owned price drops for 2020

Given the high lease penetration levels over the past three years, analysts are expecting off-lease supply to continue to increase in Canada through the rest of 2019 and into 2020.

As for the rest of this year, RVI expects wholesale volume to jump by 1.8% through the end of 2019, perhaps putting further downward pressure on used-car prices. Consequently, RVI expects used-car prices to drop 0.7% from current levels by the end of 2019 — but still remain 1.7% higher than prices at the end of 2018.

Murphy expects rates to remain high for used cars, “provided there are not a lot of negative signals from the economy, or the Canadian dollar does not strengthen greatly.”

He added, “The price of fuel could be a factor for the more thirsty vehicles, but that is not always the case.”

Looking ahead to 2020, it looks like the industry will be following some similar trendlines and watching carefully movement on many of the same market factors.

Canadian Black Book has been “watching and waiting” for the price trend to slow here in Canada, and that has yet to occur despite rising supply levels, Murphy said.

“We will certainly be watching the dollar, the price of fuel and the Canadian economy at large; and if there are no headwinds the positive price trend could continue, but I would expect smaller gains overall,” he said.

Although RVI expects used-vehicle retention will continue to be strong for the remainder of 2019, Cimino said the company is forecasting used-car prices to drop approximately 4.2% from current levels by the end of 2020.  

“We expect overall used-car supply to continue increasing, along with the exchange rate beginning to tick upwards and hit $0.80 in 2020; these factors will put downward pressure on used-car prices,” he said, noting this was RVI’s baseline forecast.

There is a higher degree of uncertainty in the Canadian auto market than past years due to the ongoing U.S. trade war and implementation of tariffs, in addition to ongoing recessionary fears for the U.S. market, Cimino pointed out. And shifts in either of these global concerns across the border could potentially have significant impacts on used-car prices in Canada.

Although the near future may be a bit hazy, overall, it seems 2019 has been a solid year for the pre-owned auto industry in Canada for both wholesale and retail.

Kontos called retail demand in Canada “solid”, especially for light trucks, which have grown in popularity over the last few years. And he expects wholesale and retail patterns to continue for the remainder of 2019 and into 2020.

“It is a very healthy situation.  Despite expected rises in supply, there does not seem to be the corresponding fall in prices,” Murphy said. “The market is strong, and it appears the vehicles on the market are finding buyers without a lot of difficulty.”