The US used car market is booming, with a sharp rise in vehicles’ residual values benefiting carmakers and rental car operators.
Used vehicle prices jumped 16.3 per cent in the year to March, far above the overall inflation rate of 2.3 per cent, the US labour department reported. A used-car price index compiled by Atlanta-based Manheim Consulting reached a record high in March.
The jump is due partly to improving demand, but also reflects a shortage of vehicles created by sharp cuts in leasing over the past two years and last summer’s cash-for-clunkers scheme, which encouraged owners to trade in old cars for more fuel-efficient new ones. The old cars had to be scrapped.
Tom Kontos, chief analyst at Adesa, a vehicle auction group, said “dealers continue to bid aggressively for available units needed to meet solid retail demand in the midst of tight supplies”. He estimates that auction inventories had shrunk to 31 days’ supply at the end of March, from 44 days a year earlier.
“Generally, it’s a good thing for people in the industry,” Mr Kontos said. With car lease terms closely linked to residual values, the jump in used car prices coupled with improved credit conditions has enabled carmakers to put together more attractive deals, and thus expand their leasing business.
General Motors re-entered the leasing market last September. Almost 10 per cent of its US sales volumes are now financed by leases, including more than a quarter of Cadillac sales.
Rental car operators, the biggest sellers of used cars, are more exposed to price swings as a result of last year’s financial crisis at GM and Chrysler. They now dispose of a higher proportion of vehicles through auctions rather than selling them back to the carmakers under guaranteed depreciation arrangements.
Tom Webb, Manheim’s chief economist, said the rental companies now receive higher prices for their used fleets even though the vehicles have an average of 40,000 miles (64,000km) on their clocks, up from 30,000 a year ago.
JPMorgan cited improved used vehicle prices this month as one reason for its bullish view on two listed car-rental groups, Avis Budget and Dollar-Thrifty.
Mr Kontos predicted that prices were likely to climb for some time. “There are still a lot of people who have no choice but to pay the price for a used car because they cannot buy a new car,” he said. Furthermore, “there are more downsides to new vehicle supply than upsides”.
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