Used Car Values?,,,,, Be Very Careful Who You Listen To!......
Well, well. Well; the used car market at the moment? It’s certainly a challenging trading environment for those without the experience, skills, common sense and nerve to navigate. Especially with all the opinions on pricing being banded around; mainly from those with little or no experience in actually buying and selling used cars, (or any commodity for that matter), for a profit.
In truth, to the uneducated outsider the used car market and the opinions surrounding pricing would make crypto currency traders blush; it’s beginning to look like the “Wild West” meets Pyramid Selling meets a Ponzi Scheme! And for many reasons I would advise those without the used car experience required to operate in misleadingly complex distress markets like those we are experiencing now, to think carefully on this:
Just Because You Can Buy, It Doesn’t Mean To Say You Should!
At centre of this trading environment is also a misinformation problem; a problem that lies squarely at the doors of the guides and auction houses; including those who work for them. Thus my criticism of the guides and auction houses, when it comes to the blanket reporting of used car values.
In truth it’s not that they aren’t of value, just that in a fragmenting and very complex used car market, the value of the data being published is of very limited value. My astonishment comes at the credence, (in an overall market sense), that this data is given, in terms of the market as a whole. In fairness though I would add the caveat that I think compiling an accurate guide to used car values is now impossible; in the same way as writing an accurate guide for any commodities market is impossible.
Why? Well any publication of values is only as good as the sources of data it has access to and if we have learnt anything over the last 2 years, it is the importance of understanding where the data we are reviewing is coming from; why you ask? Well it is a fact that data has proven without doubt that 99% of Belgians have more than the average amount of legs!
With this in mind I think it important to understand where those most vocal in their opinions on total market used car pricing and future market performance, (Auction Houses, Cap-HPI etc.), get their data from? With the auction houses it is pretty transparent, they collate their own data from their own auction businesses; for guides like CAP HPI though, it is a little murkier.
Because data source and depth is so important, I thought I would call one of the guides, (CAP HPI), to ascertain just where their pricing data comes from. We are now over 3 weeks since that call and I am still awaiting a call back, having been unable to get through to anyone on the day. So for this article I am having to presuppose, but I get a sense that CAP HPI collates the vast majority, (probably in excess of 95%), of its pricing data from auctions as well; then applies that pricing performance upwards and throughout all the age ranges for cars.
Now this worries me and in my opinion this renders CAP HPI misleading for the majority of used car businesses looking for stock. However, (and in the interest of balance and fairness), where it is probably not misleading is in the reporting of values being achieved for the stock that is passing through auction houses; sadly though this results in a critical flaw, one of a narrow data cut.
As an example; I read a very interesting article by Cox Automotive using data from Manheim Auctions, which was then used to go on and make far reaching predictions for used car values and the performance of the used car market throughout 2022. Using just this data and the problems of new car supply delays, it then went on to justify their predictions. However when you dug deeper into the article and the data being published it appears that, once again, the sweeping statements and predictions are dangerously misleading.
As much as we are all allowed an opinion, there is an onus on those reading any article and the associated predictions to assess their value; just as you would if you were getting your news from Facebook! The article openly states that the data showed the average age of the cars in the data cut was 100.9 months; that’s over 8 years old! And that the average mileage was over 70,000 miles; both these figures were up from their previous data cut. Oh and the average selling price was up by £1,917 from last year’s average price of only £6,133.
Now this data still has value, (in terms of the prices being achieved for cars over 8 years old with an average of 70,000 miles on the clock), but I’m not sure it is a data cut big enough to then go on to make sweeping predictions about used car values across the entire market and/or the performance of the used car market during 2022. Nor is it the data upon which a complete guide to used car valuations can be published, in the case of the guides, CAP HPI etc; why? Well where do we start?
Firstly the used car market (like all commodities markets) is made up of individual markets, all with differing drivers on prices and therefore performing differently; ergo publishing a guide to used car values is now impossible. No one has the required grasp on values in the entire market and the data above proves this point; but let’s explore this in greater detail.
Firstly, and this important, auction values are misleading for many reasons; the first one being the narrow data cut, the second being the purchaser profile, (the mix of trade and private buyers looking for a deal – pushing prices up), and then the most important reason of all.
The fact that successful used car acquisitions professionals, those who know how to secure and lock used car stock into their business, are not buying retail used car stock from auctions.
The prices these professionals and businesses are paying is unknown and only recorded within the 4 walls of their business. Whereas auctions sadly are only frequented by those who do not know the first thing about acquiring used stock, in volume and for a retail profit. They are the last bastion, where all those who have no other options go to buy used car stock. Successful used car businesses have sources of used car stock secured and locked in years in advance and via proven acquisitions initiatives and programmes.
Having written about this for my Used Car Business Development Blog, I will not expand anymore on this point further; anyone interested can following the link below to one of the associated articles.
There also appears to be a very one dimensional understanding of the used car market amongst those making their sweeping statements surrounding values and the performance of the used car market; and all routes lead back to delays in new car production resulting in rising used car prices!
Well this is too simplistic and wrong; why?
Well simply, a lack of new car production will not necessarily lead to rising used car prices across the board. Anyone thinking this is the case is naïve and shows the world nothing other than the fact that they don’t know how to read and/or operate in commodities markets. Probably because they have spent their careers reporting on used car markets, not operating successfully within them; a small but very critical point!
The pivotal effect on commodities pricing comes from a very important ratio; Supply and Demand! It is wrong to assume that just because there are production problems with new cars that this fact, (in isolation), will drive both used car demand and pricing up; and let me explain why?
Firstly we must try to understand all the “Drivers” at play, those that have driven the used car market and the prices being paid for stock in sectors of the used car market upwards; because it is a lot more complex than delays in new car production. The used car market of the last 2 years experienced a “Perfect Storm” and was influenced by some “Drivers” that have never seen before;
• A worldwide pandemic.
• Customers staying at home with time on their hands.
• A shortage of new and used car product.
• The suspension of market forces via Government support during the pandemic.
• And most importantly; the government then pumped this market full of free money.
Now this is a dangerous cocktail for the prices of any commodity, as it was for the housing market as well, but guess what people? Apart from the delays to new car production all these “Once in a Lifetime” powerful pricing drivers and influences have gone!
The long term effects of this are still to play out and in some aspirational used car markets, (more of that in a future article), prices may remain robust; but with no credible evidence that consumers are rushing out to pay these overinflated prices, I think the market is entering a dangerous period. Especially for those “Sheep-Like - Follow The Herd Businesses” that have been paying the overinflated prices for used car stock, because they had no other option.
In reality, after years of PCP driven sales, at the moment most customers would probably be better off refinancing the Residual Value on their current car, than being tempted to pay over the odds for a used car, (if no new car production is available); in many cases being a backward step from the car they already have. In fact, this could be the next disruptive trading model to hit the sector, a finance company refinancing Residual Values, which could affect both the new and the used car market; we shall have to wait and see.
So in finishing what would be my recommendations and strategies for those running and/or owning successful used car businesses?
Would I Pay For CAP-HPI (or any guide for the at matter) Subscription?
No!
Not until I have had the discussions required with those responsible for the valuations being published; in regard to where the data is coming from. And I wouldn’t want to hear that they speak to a few “Pet Dealers” to get a read on prices, activity and customer levels.
Once I have this level of understanding I would assess whether or not my business would be operating in these markets and the associated profile of used car stock? If not, what’s the point? The successful used car professional, (one skilled in acquisitions), should know how to acquire and value the product they are supposed to specialise in. They should not need their decisions validated by a guide, written by people reporting on values and having never operated successfully in the market they are reporting on.
Would I Listen To The Auctions?
No! There would be no need or point; any business I ran would not be sending any cars to auction houses; full stop! Rather I would use the valuable stock resource to further build relationships of supply for my used car business; not to line the pockets of the “Wolf in Sheep’s Clothing” businesses that pose an existential trading threat to my own.
Lots for everyone to consider and acquisitions expertise will be the most important skill within used car businesses moving forward. With reduced used car vehicle parks looming on the horizon, only those businesses with the professionals possessing the skills to acquire and secure used car stock in the volumes required, (and at the prices required to remain profitable), are going to survive.
Be in no doubt that no business can out run the numbers and the financials; anyone wanting to know how their business can be the right side of this equation, via successful programmes of used car stock acquisition and used car retailing, can feel free to contact me in confidence. Alternatively you could always leave your business in the hands of the valuations published by the guides, CAP-HPI etc.? It’s your choice?
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