New cars have stalled on dealer lots, but used cars are fetching strong valuations
In April of last year, new car sales dropped 48.5% compared to 2019 figures. To help recover from this massive hit, dealers want the government to step in and modify or get rid of altogether the taxes that apply to new vehicles. They hope this will incentivize new car purchases. Compared to April 2019, the industry missed out on $1billion due to the COVID-19 pandemic hurting the income of millions of Australians. 31% of earners reported decreased income, and 75% of businesses had a reduced cash flow that will impact their business negatively over the next few months.
Decreased new car sales are nothing new. April was the 25th consecutive month with a decline. Australia is far from the only country that saw a buying slow down. The US declined 47% in the same month, and Europe saw an 80% drop.
As of September, purchase intent is still 14% lower than pre-pandemic levels, only 4 points better than May. And when Australians do consider purchasing a vehicle, they are looking to spend less than they otherwise would have without the COVID factor.
While salespeople in the showrooms might be twiddling their thumbs, digital sales are through the roof as lockdowns come and go and the economy shows signs of a rebound. This is starting to grow the open market of online car sales. This infant market almost saw the few competitors in the space go under, but now they are starting to be realized. Less than a third of young people would prefer handling a car sale in person and would pay more to have the entire thing be contactless. Going to a dealer and haggling with a car salesman is not a pleasant experience. Both parties are under pressure and stress to make a good deal.
There are strong indicators that this way of car shopping is going to start becoming a significant factor in the coming years post-pandemic. Carvana is a rapidly growing online car buying company in the US, and the online used car seller Vroom had a successful IPO in the middle of last year.
Even if new car sales continued as usual last year, there were supply issues as factories slowed or halted production and global movement of goods was interrupted. As Australia no longer manufactures cars domestically, the market relies almost exclusively on Asian and European manufacturing.
While new cars aren’t seen as attractive to buyers right now, quality used cars are retching a higher price on dealer lots. Consumers have shifted away from public transport and see personal transport as a good alternative. Unfortunately for the environment, these consumers have been gobbling up all the good used cars instead of buying a pushbike. Used cars do the same basic function as a new one, and fuel economy is not a concern right now with cheap fuel prices. The reduced supply of used cars means dealers may be less willing to negotiate with potential buyers. But they are also having a harder time finding used cars in good condition that are at a price that they can flip for a profit. In some cases, they are having to find new sources of used vehicles.
It is a perfect storm for used car values. Very few people are trading in their cars for an upgrade, and those who are shopping are looking to buy at a lower price point, leading them to see the value of a used car.
Used vehicles were not immune to the factors that affected new cars in autumn of last year and dropped 14% between March and April. But they rebounded much faster, climbing back to within 4 points of pre-pandemic levels. Looking into the future to see if there could be another similar slump due to a new variant of the virus or a botched vaccine, it’s unlikely. The used car market is unlikely to take another downturn as there are more factors supporting the price stability of used cars.
Right now, all consumers are looking for in a vehicle is a substitute for public transport that gets them from point A to point B, not a social status symbol. A used car is just that. Anything to get them off public transport until there is a vaccine and proper heard immunity to the virus.
For those who do have the extra cash and are looking to trade in a car or truck for a newer model year, the beginning of this year might be your best bet on scoring a killer deal on a 2020 model year. Those cars on the lot right now just became last year’s model, dropping their value even though they don’t have any more ticks on the odometer than last month. Dealers are motivated to move these vehicles to flip over to the 2021 model year inventory.
Not only are dealers looking to make room for new inventory, but you will also be able to ask for a better deal with your trade-in, especially if it is in good condition. With very little demand for new cars, dealers motivated to flip 2020 models, and a strong price of used vehicles, you would be hard-pressed to find a better time to trade-in and upgrade to a new vehicle.
Seeing that Australia has been handling the pandemic very well, it is expected that the economic recovery process will be quicker than some others. This will breathe confidence into the market, and we could see people start buying large ticket items. Those who were able to keep working from home weren’t able to go on holidays or shopping sprees, giving them more purchasing power now. We have yet to see if Australians will choose to spend or save that cash, but they could very well look to spend that on a car that is more expensive than they normally would consider. Or they could decide to spend it on a home renovation just in case they are ever locked inside again for weeks on end.