U.S. automotive depreciation is expected to rise to 15 per cent in 2019 — up from 12.4 per cent in 2018, which was the lowest rate in four years, according to Black Book’s joint U.S. Vehicle Depreciation and Auto Asset Backed Securities (ABS) report with Fitch Ratings.
Depreciation rate
The annual depreciation rate is based on two-to-six year-old vehicles. The average depreciation over the previous eight-year period was 12.5 per cent. The years 2011 and 2012, in which depreciation hovered around 8.3 per cent and 10.4 per cent respectively, experienced the lowest percentage of depreciation. The report suggests this was due to a “strong pent-up demand right after the recession,” as annual depreciation prior to the Great Recession was 16 per cent — the norm.
“The demand for used vehicles peaked in 2018 due to a confluence of favourable factors: low interest rates, excellent credit availability with lower delinquencies, extremely high job growth, tax cuts enabling both consumers and commercial buyers to upgrade, increased marketing of off-lease vehicles, and disciplined incentives on new vehicles with rising transaction prices,” said Black Book in its report.
Several of these factors are expected to remain strong throughout the year, but will eventually slide down from their peaks. This could lead to the used vehicle market experiencing a higher depreciation in 2019, although another year of good performance (compared to pre-recession) is still anticipated.
Used Vehicle Retention Index
In terms of Black Book’s Used Vehicle Retention Index, an increase of 2.1 per cent from 113.1 in January 2018 has been observed — with the index having settled at 115.4 in January 2019.
The index enjoyed a strong lift from May through September, although it was considered unusual for that period of the year. The 2018 year demonstrated a strong performance in this domain, but the index is predicted to decline in 2019 as vehicles register slightly larger depreciation.
“While the economy is expected to continue to expand in 2019, overall demand for cars and trucks may normalize,” said Anil Goyal, Executive Vice President, Operations at Black Book. “In addition, we expect sustained high levels of supply of used vehicles in the market. As such, we are forecasting overall depreciation to rise in 2019.”
