Boom sales are a bust for residuals

Do buyers really enjoy 60 per cent of the value of a new car within the first three years of its life?

According to FleetPartners CEO Nick Johnson, that's the typical depreciation experienced by buyers of new cars after three years of ownership.

FleetPartners is a fleet management company based in Melbourne. The company's business is contingent on setting new car 'residuals' -- the balance of the car's 'value' on the expiry of a lease, as predicted by the lessor when the vehicle is new.

A study by the company indicates that residuals suffer -- that is, the core value of the car suffers -- if the new car market is enjoying boom times.

Residual values go limp in a free market when (over)supply of used cars is not commensurate with demand because those (private) buyers who might have bought a three-year old car are now in the position of affording a new car.

With less demand, the price (residual value) of the three-year old car will reflect that situation by sliding below the level set by the lease company.

The FleetPartners study indicates that residual values will slide as the new car market continues to sell at record levels.

"Looking forward, our prediction is for a continued softening in residual values, probably in the order of a further 20 per cent between now and 2011," Mr Johnson said.

In the past, it was common for cars to depreciate 20 per cent in the first year and by lesser amounts in subsequent years.

In 1995, when new car sales were at a four-year low, residuals averaged 68 per cent of the new car price.

With the surge in new car sales over the past 13 years, residuals have slumped. This has been graphed by FleetPartners (pictured).

"The challenge for fleet managers as they try and factor in residual values cannot be understated. With residual values set to weaken further, the need for careful, strategic fleet management advice and assistance with vehicle disposal has seldom been more acute," Mr Johnson said.

With no immediate end in sight for the new car sales climb, the residuals of used cars will remain lower than they were a decade ago and may even worsen. 

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