It is not a question of ‘if’ the industry will see a softening in the used-car market, it’s a matter of how much, and when, TD Auto President and Chief Executive Andrew Stuart told Auto Finance News.
“We’ve got a storm coming that says there was pent-up demand, we’ve sort of sold through that as an industry, and then you’ve got increased supply coming as a result of the increase in the leasing market over the last several years,” he said. “Then there’s no doubt in my mind that you’re going to see downward pressure.”
Leasing represented about 33.6% of the market in the fourth quarter of 2015, up from 23% in 4Q10, according to Stuart, and with lease terms typically at 36- to 48-months, the used market will soon see in influx of young, used cars.
“The figures that we’re seeing last year in 2015, lease returns were about 2.6 million,” he said. “This year they’re estimating 3.1 million, in 2017 – based on the leases that are in the market and due to return – we’re looking at 3.6 million across the industry, and the going up to 4 million in 2018.”
The biggest complication will be downward pressure on used pricing, however there is “opportunity there,” because that pressure will make used cars more affordable, Stuart said.
“I think that everyone would agree that the new car market is going to taper off a bit,” he said. “If we hit 17.6 million [sold] this year, most economists are calling for a little bit of softening maybe 17.3 million next year, and maybe a little more softening the year after – I see the increased opportunity being that there will be more used cars available to kind of back fill some of that space.”
If the banks shifts its focus and create products geared toward the used market, then the influx of used supply will “be a good thing for us,” he added.
Lenders that do offer leasing should prepare to adjust residual values, Stuart said, particularly if those values were set three or four years ago. “That’s going to affect you,” he said. “And a lender that’s not playing in the lease space, the biggest impact on us would be on loans that default and we’re disposing of through auction, so you’ll certainly seen some downward pressure on loss given default — that will affect us, and think we all need to prepare.”
