The UK new car market is likely to slow gradually during the course of 2005, with around 100,000 to 150,000 fewer sales compared to 2004, according to Glass's.

With demand for used cars also faltering slightly, depreciation will continue on a downward trend, albeit at a slower rate than in 2004.

Sales in both the new and used car market will continue to be influenced heavily by prevailing economic conditions.

"With general inflation well below target and house price inflation subdued, it is widely believed that interest rates have now reached a peak," said Glass's managing editor Adrian Rushmore. "Once consumers believe this, buying confidence will return in the early spring, although at a lower level than last year. That means the propensity to buy new and used cars may only be slightly down on what we saw in the last six months of 2004, although the market will be deprived of equity release from a lack of house price inflation."

In the used car market, residual values will be affected by the improving availability of suitable stock on dealers' forecourts. "We have the inevitable legacy of rising new car registrations over recent years," noted Rushmore. "For example, one consequence is that the number of three-year-old cars in the car parc will increase again this year, in the order of 80,000 units.

"Because we believe that the natural retail demand will be slightly less, more buyers will only be found on the basis of lower prices. It is for this reason that residual values will continue to fall during 2005, but not to the same degree that we witnessed last year."