Much like the new-vehicle market, used-car sales are likely to plummet in the short term as dealerships remain closed or restricted and consumers stay home because of the COVID-19 pandemic.
But the used market could recover more quickly than the one for new vehicles as more consumers worry about their finances and opt to buy a less-expensive used vehicle, said Brian Murphy, vice-president of research and analytics at Canadian Black Book.
“Consumers are going to be under financial pressure for the rest of the year,” Murphy said. “That makes the used-car purchase perhaps more attractive compared to new cars.
“A lot of households are going to try to be frugal for the rest of the year. Instead of buying a new car, they may take advantage of the depreciation that’s already baked into a used one.”
DOUBLE WHAMMY TO SALES
The pandemic has rocked automotive retailing, causing many dealerships to close their showrooms either voluntarily or placing them under orders from governments shutting down nonessential businesses during most of April and early May. Combine those shutdowns with surging unemployment figures, and new-vehicle sales plunged in the second half of the month as demand dried up.
March new-vehicle sales fell 47 per cent from a year earlier, according to Scotiabank. April sales were worse, down 75 per cent according to DesRosiers Automotive Consultants as consumers stayed home and governments increased social distancing measures to curb the spread of the coronavirus.
Those same factors are likely to put a damper on used-vehicle sales heading into May, Murphy said.
Auto analyst Dennis DesRosiers expected used-vehicle sales to fall below the 3.4 million reached in 2019. Before the pandemic, he had expected between 3.5 million and 3.6 million sales.
Consumers in the market for a vehicle because theirs was scrapped were likely to help boost a weakened used-car market, DesRosiers said. He expected between 1.2 million and 1.4 million vehicles to come off Canadian roadways this year as they are scrapped. That’s down from an estimate of between 1.6 million and 1.7 million as less driving on Canadian roadways leads to fewer collisions and kilometres driven.
But it still presents an opportunity for dealers to sell vehicles to customers in need of a car.
“Those consumers have a very difficult choice,” DesRosiers said: “Don’t drive and don’t have a vehicle at your disposal, or go and buy another. I suspect most of them will go and buy used since that’s what they normally do.”
TOO MANY USED CARS? ...
Still, while used-vehicle sales could be less of a problem for dealers than the new-vehicle market, the COVID-19 pandemic is expected to have long-term ramifications on used-vehicle values and supply, experts said.
Take supply, for example. Many dealers and manufacturers told Automotive News Canada that they were offering extended leases for consumers whose vehicles were set to come off lease in the coming months.
Black Book’s Murphy said 35,000 to 40,000 leased vehicles were expected to return to the Canadian market each month between March and June. As more consumers opt to temporarily extend their leases, he said, it could create “pent-up supply” in the used-vehicle marketplace later in the year. “We usually talk about pent-up demand,” Murphy said, “but here we may have some pent-up supply of offlease vehicles where, come August or September, the theory would be that maybe 100,000 more vehicles show up in the remarketing channels that weren’t there.”
That could create challenges in the long term for the industry, he said. Not only would far more vehicles have to go through remarketing channels and be retailed, but a glut of supply also could cause used-vehicle values to drop.
... OR TOO FEW?
DesRosiers, meanwhile, cautioned that the supply of used vehicles could drop as fewer consumers trade in recent new-vehicle purchases and as fewer fleet sales are made.
“The primary source for younger used vehicles is a trade-in related to a new-vehicle purchase,” DesRosiers wrote in a March memo. “Both the lack of fleet [sales] and end-of-lease tradeins will impact the used-vehicle market quickly, so this lack-of-supply issue could hit the used-vehicle market sooner than most would suspect.”
Used-vehicle supply could also be affected by how many U.S. buyers purchase Canadian used vehicles at auctions. In a typical market, a low Canadian dollar would spur more demand for Canadian vehicles from U.S. buyers seeking a discount. Murphy said that in recent years, between 200,000 and 300,000 vehicles have been shipped to the United States from Canada, helping prop up used-vehicle prices north of the border.
But with border restrictions in place and plummeting demand in the United States, it was unclear whether U.S. buyers would come back to Canadian auctions at the same pace once borders reopen. “The dollar seems to be in the right spot, so that’s a good check mark there,” Murphy said. “The question mark is what is the appetite for used cars on the U.S. side of the border? Because if the appetite is not there, it’s bad business to ship it across the border.”