UK: Sales boom likely to end in 2003 - Glass's Guide
The sales boom that has characterised the United Kingdom new car market over the past two years is likely to run out of steam during the early part of 2003 according to pricing expert Glass’s Guide.
"As consumers become more concerned about their disposable income, they can be expected to curb their expenditure on new cars," said managing editor Adrian Rushmore. "This is particularly true of the lower income groups that fuelled a significant amount of the growth in the small car sector over the past two years.
"A number of predictable economic factors will make many individuals more circumspect about their spending. For example, there is the increase in National Insurance contributions effective from April. In addition, consumers will gradually awaken to the fact that their pension provision is inadequate. The likelihood is of a positive start to the new car market in 2003, but we expect sales to become more restrained by mid-year.”
“Our guesstimate is for a total of 2.3 million registrations in 2003.”
The list prices of new cars actually rose by 2% during 2002, but Glass's suggests that this did not reflect the real situation in dealerships across the UK.
"There was a slight reduction in transaction prices, reinforced by a very high number of tactical consumer campaigns offering discounts, free insurance and low cost finance," Rushmore said. "However, as market demand starts to recede as we progress through 2003, there will be mounting pressure on manufacturers and retailers to devise more enticing offers. Consumers may well find even better deals than those that were on offer last year."
Used car sales grew around 5% in 2002, but Glass's believes the second-hand market will struggle to maintain this momentum in 2003. Rushmore said: "The behaviour of used car customers will tend to mirror that of new car buyers, with increasing numbers noticeably absent from dealer forecourts."
"On the face of it, two record-breaking years of new car sales could have dangerous ramifications for the supply of used cars, with unwanted models flooding the market and hitting values. However, given that something like 60% of cars bought each year remain with their first owners for between 37 and 48 months, most of the new cars sold in 2002 will not arrive on used forecourts until next year and beyond."
Given that 2002 was a record-breaking year for new car sales and used car business also flourished, it is somewhat surprising that values for one-year-old models were down 7%, and two- and three-year-old models were down 4%. "Much of this was due to the aggressive and successful marketing of new cars that had the effect of switching customers to new," Rushmore said.
"There was also a powerful aspirational urge for customers to acquire a new car, even if this meant taking on a heavy burden of debt. The likelihood is that as customers become wary and hesitant about their borrowing commitments, sales will recede and new car prices will inevitably edge down. We would not be surprised to see a repeat of the price falls witnessed last year."
Other factors affecting the UK's car market in 2003 include new legislation effective from 1 February making it mandatory to produce a V5 registration document or a V11 renewal when applying for annual car tax. Vehicles without the necessary documents could consequently become much harder to sell, potentially causing significant disruption in the used car market.
"There will almost certainly be a two-tier pricing structure for cars with and without documents," said Rushmore. "The financial penalties will be so acute that most trade vendors will quickly put strict measures in place to protect themselves. This will mean, for example, that consumers could find great difficulty in getting a respectable value for a part exchanged car if it is offered without documents."
Unlike some United States commentators, Glass's is, however, sceptical about the prospect of any significant ramifications on vehicle sales if Britain is involved in war in the Middle East.
"If the last war with Iraq is anything to go by, the effect on the market will hardly be discernible. Conventional thinking is that 'provided it is not going on in my back yard I have no need to worry'. Events should therefore leave prevailing sales patterns largely unaltered," Rushmore said.
Given that the diesel share of the new car market has increased from 14% to 23% since the beginning of 2000 there has been much speculation about an impending meltdown in residual values. Glass's argues, however, that values should remain strong.
"As time passes, used car buyers will become powerful advocates for the cause of the new diesel technology. Increased desirability will translate into greater demand, which will mitigate against the increased supply," said Rushmore.