Potential impact of COVID-19 on residual values

Potential impact of COVID-19 on residual values

Since mid-March, the corona pandemic has had a firm grip on social and economic life in most countries. The situation is hardly comparable to any crisis in the past: Direct car sales in showrooms have come to a standstill by regulation and can only switch to the online channel. However, since the registration offices only carry out registrations in exceptional cases, the market is temporarily practically closed. This will change with the gradual opening of retail from Tuesday after Easter - but it is not yet clear whether the opening can be maintained and how the sales situation and customer frequency will change as a result of social distancing measures.

Of course, the crisis does not only affect the automotive industry - the measures to contain the corona virus are already leading to a collapse in demand in various sectors of the economy, especially in the tourism sector. How lasting the drop in demand caused by the pandemic on the car market will be can currently only be guessed at. This will largely depend on the stability of purchasing power and consumer confidence in the coming months. If unemployment remains at a high level in the long term and more and more companies are affected by short-time work, investing in a new car will probably not be a top priority for most consumers and companies.

Experience from the 2008/2009 financial crisis - which is only partially comparable to the current situation - has shown that the recovery in demand can take significantly longer than initially assumed. This was also reflected in the development of car residual values ​​at the time: the loss in value of 3-year-old used cars was significantly lower in most vehicle segments in the first 6 to 9 months after the crash than in the following 2 years. In the short term, the values ​​fell by an average of -1.3%, but in the medium term the loss in value was around -6%.

The influences on the residual value

In order to outline possible scenarios of the current crisis on residual values, it is worth taking a look at the most important factors that significantly influence the residual value of a vehicle: Among other things, supply quantities, the demand situation and, last but not least, the new price actually charged, taking discounts into account, play an important role. Discounts in particular have a direct impact on the residual value, as the difference granted to the list price can hardly be made up later on the used market. The manufacturer's strategy with regard to short-term registrations and rental volumes also has a direct influence on the expected supply volume on the used car market and thus on the price and residual value.

First about the supply quantities: As long as the supply meets the demand, the residual value can be kept high. If there is an oversupply of vehicles during the development of the range - even if only over phases - the residual value suffers and this can also be sustainable under certain circumstances. Almost all manufacturers in the EU have temporarily stopped production in recent weeks, which will be reflected in falling new car volumes this year and will therefore also result in lower volumes of young used cars in the following years.

Low demand and discount battle as the sword of Damocles

On the demand side, a weak year was already emerging without the Corona impact: New car registrations from January to February were down 10.0% compared to the same period last year. Demand is likely to collapse further in the coming months from both private buyers and commercial customers due to the current uncertain situation. If manufacturers and dealers respond to this slump in demand with high discounts, this will put the residual values ​​of young used cars under severe pressure in the medium term.

In contrast, the trend for used vehicle reports was still positive until February, with an increase of 1.9% compared to the same period last year. However, it can also be assumed that demand will decline in times of uncertain economic conditions. In addition, for liquidity reasons, some dealers may be forced to quickly sell the used cars that are currently on the market at unusually high discounts. That would affect the residual values ​​in the short term.

The scenarios for the way out of the crisis

Eurotax has examined five possible economic recovery scenarios in terms of their likelihood:

The two best-case scenarios assume a short but severe slump and a more or less rapid recovery of the market - i.e. a V-shaped course of the crisis. The middle scenario assumes a slow recovery to pre-crisis levels. In this case, the curve is U-shaped, whereby the length of the trough will depend heavily on the further development of the number of infections and the associated economic damage. The two worst-case scenarios assume a long recession, with long-term negative effects on the general economic situation and demand.

Based on the current market situation, the probability of the following 2 scenarios is similar: “slow, U-shaped recovery” and “moderately fast, V-shaped recovery”. “We can currently expect a slow or moderately fast recovery,” says Robert Madas, Valuation Insights Manager at Eurotax Austria. “The sudden drop is not expected to be followed by a very steep recovery, but rather a moderately fast or slow revival of the market.”

“The interaction of additional discounts and demand will be crucial for the development of residual value,” continues Robert Madas. “If, due to the crisis, unusually high discounts are granted for a longer period of time, especially on the new car market, then we expect a moderate loss in value of around minus 1% to 2% this year,” continues Robert Madas, “In the medium term, however, a stronger adjustment in residual values ​​of around 3% to 4% can be expected.” In the case of high discounts granted on the used car market in the short term, a higher loss in value would be expected this year, although in the medium term the values ​​should be more stable, provided that the discounts on the new car market remain within limits.

However, it is currently too early to make a final forecast as to what medium-term effects Covid-19 will have on the economy and subsequently on the used car markets. The first positive signs are currently being seen in terms of new infections every day. However, the high economic costs resulting from the measures necessary to contain the pandemic are also clearly noticeable. The coming weeks will therefore be crucial for further analysis of the market situation as well as for adapting the scenarios in order to estimate future developments on the used car market.