Used vehicle prices continued their sustained downtrend during January, according to the latest Moody’s Analytics Used-Vehicle Price Index. The report showed declines in both month-to-month and year-to-year terms. Nevertheless, January marked a slowdown in the price fall, with both passenger cars and trucks/SUVs prices only decreasing around 0.2% m/m.
Vehicle prices are still not near pre-pandemic levels, remaining 53% higher than the December 2019 level. However, the good news is that prices have come down 11% since their all-time peak in May 2022. The report noted it expected this to continue in the near term, on the back of better supply-side conditions and as global aggregate demand slows down.
On the supply side, the story remains the same as in previous months. The semiconductor shortage continues to ease. In October, the global semiconductor lead time—the time it takes for a semiconductor to reach the end consumer—had the largest month-to-month decline in several years, falling from around six days to 25.5 weeks.
Although the decline is impressive given the upward trend in lead times in the past couple of years, this value is still far from the norm. As a result, global vehicle production has not returned to pre-pandemic levels in Europe and Asia, where there has been a decent improvement. For instance, vehicle production in Japan was 35% above 2021 levels in October but remained 11% below 2019 output.
With vehicle production improving across the globe, Aussies have been able to import more new vehicles into the country. During the third quarter, Australians imported a total of $7.308 billion worth of motor cars, according to the Australian Bureau of Statistics. This represents a 29% increase when compared with the third quarter of 2021.
Moreover, the Federal Chamber of Automotive Industries has reported that January new-vehicle sales increased 11.9% year on year, representing the best January level since 2018. With more new vehicles being delivered, supply pressures in the used market will continue to be relieved.
Besides the supply side of the equation, there are increasing demand-side pressures growing in the Aussie vehicle market. Evidence that households have started to pull back on spending continues to mount. This is not surprising, as they face higher borrowing costs and are coping with high prices for nondiscretionary items such as food and fuel.
To address inflationary pressures, the Reserve Bank of Australia has already injected 325 basis points’ worth of rate hikes since May 2022. With the latest 25-basis point hike in February, bringing the cash rate to 3.35%. With further monetary policy tightening on the way, households will increasingly feel higher borrowing costs this year as fixed-rate residential mortgages are renegotiated and labour market conditions cool.
Balancing the supply side with the demand side, Moody’s Analytics projects that used-vehicle prices will continue to fall through 2023 as the supply of vehicles increases and demand slows. Prices are expected to fall by slightly more than 10% over the year.
Nevertheless, the risks to our forecast are weighted towards the downside. If global economic malaise causes the Aussie economy to perform worse than expected, drastic declines in demand will push prices down further and faster than expected.
Even on the less extreme side of the risks, demand may be hit more than expected because of rising interest rates. Rising rates may push potential buyers out of the market or shift preference to lower-end vehicles. Add to these risks the possibility of COVID-19 disruptions or geopolitical events, and the downside risks to inflated used-vehicle prices remain high.
