Fuel Tracker: Are diesel residual values finally stabilising?
5 November 2018
There are early indications that the rate of decline in diesel residual values (RVs) is decelerating in some of the EU5 markets and may even be stabilising in those that have been hardest hit. Since the Dieselgate scandal broke, diesel RVs have suffered the most in France, Germany and the UK. Spain only started to see an impact since the start of 2018 and values remain resilient in Italy.
Back at the start of 2015, used diesels were on average achieving 46% of their list price in France compared to 43% for petrol-driven cars after 36 months and 60,000km. Fast forward to the end of 2017 and petrol car value retention had climbed 3 pp (percentage points) to 46% whereas diesels only gained 2 pp to 48% over the same period. Consequently, the gap between diesel and petrol cars in France narrowed from an average of 3pp to 2 pp. However, the latest average residual value data for France actually shows an improvement in the difference between diesel and petrol RVs since July, suggesting the cold reaction to diesels in France may be thawing. The average trade value of diesel-driven lower medium cars has actually performed slightly better than that of their petrol-powered lower medium siblings as a percentage of their original list price.
Yoann Taitz, Operations Director of Autovista in France highlights that ‘the stabilising or slight increase for diesel RVs is mainly explained by the launch of new-generation diesel cars. The launch effect should be higher than what has happened in the past, reducing the the 2pp difference observed in 2017.’
The RV outlook for France is the healthiest among the EU5, with growth of over 1% forecast for both 12 and 36-month-old cars in 2019 and 2020. Diesel continues to face difficulties in the French market as far as both taxation and public perception are concerned and will be further impacted by rising taxes on diesel fuel itself.
Taitz added that ‘From my perspective, diesel RVs, especially 12-months RVs, should decrease in the next 2 years, mainly due to the impact of WLTP homologation. Regarding 36-months RVs, they would remain fairly stable in 2019 but would decrease in 2020.’
The sustained increases in registrations of new cars in recent years have caused sizeable overcapacity in the used car market. Coupled with large volumes of used car returns, major discounting and attractive financing packages on new cars have been major factors in suppressing RVs.
Based on the assumption that underlying inflation will be the same for new car list prices and used values, the 1-4-year-old car parc in the UK will continue to expand based on historic new car volumes until at least 2019. However, the ongoing decline in new car sales as a result of price increases and a reduction in manufacturer incentives should slightly ease the pressure on nearly new values.
Residual values of 36-month-old cars are forecast to fall by 1% in 2019 and 2020 although we predict stability in values of 12-month-old cars in 2019 and 2020 as the deterioration in new car demand constrains supply. Both petrol and diesel values are forecast to perform in this way in 2019 and there are already signs that the RV performance of petrol and diesel cars has realigned as the gap between their values is showing signs of stabilising at 1 pp. Average RVs for petrol cars overtook diesels in May 2018 and now stand at 46% compared to 45% for diesels.
Jayson Whittington, Chief Editor of Autovista’s UK arm, Glass’s, suggests that ‘I would expect to see stability in 2020 as there will be less diesels coming back to the market due to the big drop in sales in 2017.’.
Nevertheless, pressure on values looks set to be greatest in the larger segments, where the impact of any further shift away from diesel - coupled with a shift towards SUVs - is more keenly felt. The small car segment is dominated by petrol vehicles, with few diesel variants available, and, as such, is expected to perform at least in line with the overall market.
The trend of petrol values growing at a quicker rate than diesels in Germany continues although it is even showing the first signs of slowing here too. At the start of 2015, volume-weighted RV data reveal that at an average of over 46%, diesels retained 4 pp more of their value after 36 months and 60,000km than petrol-driven cars. By the start of 2016, this gap had narrowed to 3 pp and was further reduced to 2 pp at the start of 2017. In early 2018, the diesel advantage was negligible and they have retained less of their value than their petrol counterparts since June, with diesels now achieving just under 45% of their original list price compared to just over 45% for petrol cars. There is clearly more downward pressure on residual values going forward given the increased oversupply to the used car market, especially for diesels, but the pressure is expected to ease.
Overall, residual values are forecast to fall slightly in both the 12 and 36-month scenarios in 2019 and 2020 although petrol values are expected to remain stable. Germany has tried largely in vain to find alternative solutions to diesel driving bans, which are now being rolled out in numerous cities. Other measures such as software and hardware retrofitting and trade-in incentives are also helping to reduce air pollution but the overall message is hardly restoring confidence in diesels. Diesel still commands a price advantage at the pump but the roll-out of diesel driving bans and ongoing negative media coverage continues to confuse and alarm potential buyers. Consequently, the current expectation is that diesel RVs will decrease by about 1% in 2019 and but this is still a slower rate of decline than in 2016 and 2017.
Andreas Geilenbrügge, Manager of Market Analysis and Consulting at Autovista Group’s division in Germany, Schwacke, reiterates that ‘with still stable/slightly increasing fleet diesel volumes from 2016, we expect 2019 to be the last year of significant pressure on diesels and that they are already stabilising somewhat. As diesel bans come closer at the beginning of 2019 and will again be back in the media, there could be some implications but mostly on EU5 and older diesels that will then be older than three years. So a slight negative trend will continue for 2019 but probably be stopped in 2020.’
Geilenbrügge adds that ‘What will be interesting to observe is if manufacturers will start a “renaissance” campaign of “clean” EU6d-Temp diesels at the end of 2019 in order reduce their CO2 fleet emissions to avoid penalties. This could put additional pressure on diesels by pushing additional supply of young used cars into the market without the new and used car demand existing anymore. But, in general, both new and used diesel demand appears to be stabilising at the current low level.’
Residual values in Spain have been riding high for several years, as the weak supply of recent years struggled to satisfy the recovery in used car demand. However, with the rapid growth in the new car market since 2015, used car supplies are increasingly satisfying demand and residual value growth has slowed markedly. In fact, average values have been broadly stable in all segments since Q1 2016 and have even started to weaken in recent months. The exception is petrol lower medium cars, which are now enjoying higher average values than at the start of 2018.
In the EU5, RVs of diesels have proven most resilient in Spain. As in Italy, the gap between the average residual values for petrol and diesel cars has shown comparatively little change compared to the UK, France and Germany. The decline in the diesel share of the new car market is hardly mirrored in RV performance as supply still remains constrained, even for diesels, after years of poor new car sales. However, demand for diesels is waning and values have been declining since the start of 2018, especially in the smaller segments. Accordingly, the gap in the average value retention between diesel and petrol cars in Spain has been falling and now stands at just 2 pp compared to 4 pp in January. Confused public communication regarding diesel cars has accelerated the decline and if the Spanish Government introduces legal restrictions on diesels, the impact on values will be amplified.
Overall, 2018 to 2020 are set to be years of stability as far as RVs are concerned but they face greater headwinds if used car demand growth slows as supply continues to rise. Pressure has been relieved on young used cars as incentives made new cars appear more attractive. While this could also provide some scope to increase the price of older vehicles, the wealth of 36-60 month old vehicles beginning to enter the market in the next few years, many of which were purchased at a lower price due to the PIVE incentive scheme, will begin to have a deflationary effect on prices.
The move away from diesel is expected to be increasingly reflected in Spain’s used car market, with a negative impact on RVs of 2.5% and 3.3% forecast respectively for 2019 and 2020. Petrol residual values are forecast to benefit - gaining 1.5% in 2019 and a further 2.2% in 2020 - but both standard and plug-in hybrids will outperform petrol cars. We also foresee better RVs for new electric vehicles entering the market and a progressive decline in the values of older electric vehicles as they become technologically obsolete.
Average RVs fell in all segments in 2016 although small, cars, SUVs and petrol-driven lower medium cars proved the most resilient. Following a recovery in values in Q1 2017, this downward trend resumed in Q2 with the same parts of the market faring best. Values recovered across all segments in Q1 2018 with the usual calendar year effect but have trended downwards since, albeit with small cars, petrol lower medium cars and compact MPVs suffering the least. This is at least partly due to the greater exposure to diesel lower medium cars, upper medium cars and SUVs as even used buyers are considering their options.
Despite the weaker RV performance of the diesel-heavy segments thus far in 2018 and the diminishing share of diesel in the Italian new car market, average trade values of diesels in the 36m/60,000km scenario continue to hold up well compared to their petrol counterparts. The gap between them is still averaging out at 8 pp although this is slightly lower than in 2017.
Used car demand is expected to be resilient over the next three years. The weakness in used car supply due to the comparatively low level of new car registrations is expected to have a positive effect on values. Accordingly, they are forecast to gain about 1% in 2019 and 2020. The RVs of diesel cars do face mounting pressure, but diesel is still far from being demonised in Italy to the same extent as it has been in the other major European markets. Nevertheless, petrol powered cars are expected to outperform diesels mainly because of possible stricter emissions and urban access regulations. Improvements in petrol engine technology have also driven down fuel consumption and are making petrol cars an increasingly attractive option. The RV gap between diesel and petrol is therefore expected to reduce further in Italy as it lags behind the other EU5 markets in rising depreciation of diesels.