new gold book editorial February 2018

This is the editorial commentary to accompany the cap hpi guide to future residual values for new cars.

The content is as follows:

1. gold book forecast accuracy
2. Forecast changes this month
3. Market overview
4. gold book methodology
5. Reforecast calendar 2018-2019

1. gold book Forecast Accuracy

As gold book matures since its introduction in December 2013, we have the data to enable us to measure our results in terms of forecast accuracy. The accuracy target widely demanded by our customers is to be within 5% of actual values and we are pleased that, averaged across all models, gold book has been within this target since launch.

12 month results

Since measurement started our 12 month forecasts have averaged -0.9% less than black book across all vehicle ids, and the most recent results show January 2017 12/20 gold book forecasts being -3.7% less than January 2018 12/20 black book.

The latest 12/20 forecast differences for the major vehicle sectors are outlined below:

The latter part of 2017 has seen unexpected strength in petrol values, and this has been the key driver in our accuracy results deteriorating in recent months.  We expect this strength to fall back in 2018, and coupled with reforecast changes made in in the last year we should start to move back within target as we go through 2018. 

It is worth noting that diesel values in the current market have been performing in line with expectation, and our diesel forecast accuracy from 12 months ago averages just +0.5% variance from black book. 

24 month results

Since measurement started our 24 month forecasts have averaged -3.2% less than black book across all vehicle ids, and the most recent results show January 2016 24/40 gold book forecasts being -3.4% less than January 2018 24/40 black book. 

The latest 24/40 forecast differences for the major vehicle sectors are outlined below: 

As with our 12 month results, the strength of petrol values during the second half of 2017 has been the key driver in our accuracy results deteriorating in recent months.  We expect this strength to fall back in 2018, and coupled with reforecast changes made in in the last 2 years we have seen an improvement in results this month, that should continue as we go through 2018. 

36 month results

Since measurement started our 36 month forecasts have averaged -5.3% less than black book across all vehicle ids, and the most recent results show January 2015 36/60 gold book forecasts being -5.7% less than January 2018 36/60 black book.  

The latest 24/40 forecast differences for the major vehicle sectors are outlined below: 

As with our 12 and 24 month results, the strength of petrol values during the second half of 2017 has been the key driver in our accuracy results deteriorating in recent months.  We expect this strength to fall back in 2018, and coupled with reforecast changes made in in the last 3 years we have seen an improvement in results this month, that should continue as we go through 2018. 

48 month results 

This month we are able to publish our first results for 48 month forecasts, with January 2014 48/80 gold book forecasts being -7.8% less than January 2018 48/80 black book.  

The 48/80 forecast differences for the major vehicle sectors are outlined below: 

These early results come at a time when the petrol values are currently very strong.  We expect this strength to fall back in 2018, and coupled with reforecast changes made in in the last 4 years should see an improvement in results as we go through 2018. 

Sectors reforecast this monthSectors reforecast this month

We continue to be pleased with these accuracy results since the launch of gold book, despite the recent fall-off in accuracy due to current market conditions, which we do not expect to last. We are taking advantage of our new methodology to implement a ‘virtuous feedback loop’, with each element of the forecast examined to determine how best to further improve the accuracy of our future value forecasts, while also reducing variation. This has shown itself to be effective over the relatively long period we have been measuring 12 and 24 month results, and we expect the same to be true of our future 36 and 48 month results. 

We will continue to publish these results and share them with our customers. 

2. Forecast changes this month:

New model ranges added this month:

Audi A7, BMW 2 Series Active Tourer, BMW 2 Series Gran Tourer, Ferrari 812 and Mercedes-Benz CLS. 

There are numerous additions to the following model ranges: 
Bentley Bentayga, Citroen C3, DS DS3, Fiat 500L, Fiat 500X, Fiat Tipo, Honda Civic, Hyundai i10, Hyundai i20, Hyundai i30, Hyundai Tucson, Infiniti Q30, Infiniti QX30, Lamborghini Aventador Roadster, Lexus RC, Lexus RC F, Maserati Ghibli, Maserati Levante, Maserati Quattroporte, Mazda MX-5, Mercedes-Benz GLS, Mini Convertible, Mini Hatchback, Nissan Juke, Nissan Qashqai, Peugeot 3008, Peugeot 308, Peugeot 5008, Skoda Fabia, Toyota Auris, Toyota Prius+, Vauxhall Viva and Volkswagen Up. 

Sectors reforecast this month

This month, we publish our most recent reforecasts for the Upper Medium, Executive, Large Executive, and Luxury Executive sectors.  

The overall impact of the changes at 36/60 is set out below: 

We have not changed our future market deflation assumptions for any of these sectors, so the reforecast results reflect the effect of the latest black book values used as the starting point in the new forecast calculation. There are some quite wide variations between model ranges, but in general petrol values have held up better than diesel values in black book. The Executive Diesel subsector contains some models whose black book values have fallen considerably since the previous forecast 5 months ago, and this is reflected in the average reforecast changes for this subsector. 

Other forecast changes this month 

Aside from the sector reforecasts, there have been other changes this month to the following ranges: 

Revisions to walk-ups following analysis of latest black book data 

• Audi A7 diesel – increased walk-up from SE (master) to S Line, resulting in improved forecasts for S Line derivatives 
• Audi Q7 diesel – increased walk-ups from SE to S Line (master), and from 218ps to 272ps (master) engine, resulting in reduced forecasts for SE and 218ps derivatives 
• BMW X1 diesel – reduced walk-up from 18d to 20d (master) engine, resulting in improved forecasts for 18d derivatives 
• Suzuki Jimny – increased walk-up to SZ4 trim, resulting in improved forecasts for SZ4 derivatives 

Tagging corrections 

• Fiat Tipo (Cap ID 75900) – Manual transmission tag corrected to Auto, resulting in improved forecast 
• Mini Petrol 2.0 Cooper and John Cooper Works – multiple pack models now tagged correctly in line with equivalent diesel models, resulting in reduced forecasts (15 CAP IDs affected) 

Seasonality changes

In line with our gold book methodology, all other model ranges which are outside of the sector reforecasts and outside of the other changes listed above, have had their values moved forward from month to month by seasonal factors which are differentiated by sector and fuel type and are based on analysis of historical black book movements. 

Overall impact on forecasts

The overall average change between the new gold book forecast and the previous gold book forecast is approximately -0.3% at 36/60, which is in line with normal expectations of the seasonal change for full year forecasts between January to February.  

Details of all values revised by ±5% can be found via the following link: Monthly Reports

3. Market Overview

November 2017 saw the Bank of England base rate increased to 0.5%; and the announcements that from April 2018 there will be an additional 1% BIK surcharge for diesel company cars that do not meet the latest emission standards; and an increase in the 1st year VED rate for diesel cars not meeting the latest emissions standards. 

In recent months Brexit negotiations have progressed, but previous deadlock confirmed our long held view that Brexit will be a complicated process that could take considerably longer than 2 year to complete. Full Brexit is now not expected to happen until 2021 at the end of the proposed transition period. The outcome will still not start to become clear for some time but future trade agreements which negatively impact the UK economy (and that of other major EU states) are still considered unlikely.  

The outlook for the UK economy remains unchanged. The latest new independent economic forecasts published by HM Treasury in November still do not forecast a recession and therefore remain in line with our own view, with a slight reduction in GDP in 2018 and 2019 but recovering thereafter. Not all ages and sectors of vehicle are directly impacted by GDP, and in some cases this will be offset by lower future registration volumes. Forecasts for inflation and unemployment show no obvious signs for concern. 

We expect some mildly negative effects on the economy in the short to medium term, due to reduced business capital expenditure and investment, but expect consumer spending to continue to drive a stable economy. The protracted nature of the Brexit will allow time to assess the most likely outcome and future forecasts published by HM Treasury, therefore at present we are planning to conform to our original timetable of sector reforecasts and do not consider it necessary to embark on wholesale reforecasts. 

As leasing and PCP returns increase, values are broadly expected to decrease in line with previous seasonal aging patterns, with negative impact from a slowing economy mitigated by the effects of decreased supply of nearly new cars.  

In 2017, as we expected, the exchange rate level since the Brexit referendum made the UK less profitable for manufacturers  and registration volumes fell by 5.7%, assisted by diversion of volume to other European countries, where pent up demand for new cars remains from the recession in 2008/2009.  

In 2017, diesel registration volumes fell by 17.1%, accelerating the trend seen in recent years.  

However diesel values have held up well (in line with our future deflation assumptions), but petrol and hybrid values have been particularly strong as buyers seek an alternative to diesel where available. We consider this current strength is not sustainable beyond the short term and values will start to fall back as they start to look too expensive and use supply of these fuel types starts to increase.  

In 2018 we expect the trends seen in 2017 to continue: a further fall in overall registration volumes, with diesel taking the largest fall (assisted by company car drivers avoiding the BIK taxation increase); with continuing stability in used diesel values, but with a softening of used petrol and hybrid values. 

Demand Outlook

The outlook for the UK economy is uncertain in the context of Brexit but the consensus of the latest independent forecasts for GDP is no cause for alarm. Making decisions on interest rate changes based on % unemployment is far less reliable than it has been in the past and we are continuing to investigate whether we can usefully integrate any additional labour market metrics into our regression modelling (currently % unemployment is one of 15 labour market metrics studied). The unemployment rate remains low at 4.3%, and wage growth remains relatively slow by historic standards, especially given current labour market conditions. 

Despite the base rate interest rate rise  in November 2017, interest rates are expected to still remain low for the medium term. Any significant further increase in base rate still seem unlikely until there is a combination of further improvements in wage growth and increases in rates of headline inflation. 

CPI continues to creep up due to the sterling exchange rate and is now at +3.0%, exceeding the Bank of England’s lower limit of +2%. RPI is at 4.1%.  

Oil prices remain very hard to predict.  During October 2016, the OPEC countries agreed to an initial cut production, which was then extended for a further 9 months and helped to ensure market stability. Now that supply is returning to levels commensurate with demand, oil prices are likely to rise steadily over the forecast period, but fuel prices will remain well below historic levels unless there are significant currency movements against the US Dollar.   

Wage growth remains reasonably healthy, although slow by historical standards; and price inflation is now increasing; so these conditions should continue to provide a positive impetus to the overall economy. 

Initial GDP results for Q3 2017 of +0.4% exceeded expectations, driven by strong performance in services and manufacturing and indicating annual GDP for the whole of 2017 of around +1.7% (compared to 2.0% in 2016). Independent forecasts continue to indicate relatively stable growth rates throughout the next five years, with no organisation now predicting a recession within that period. 

Consumer and Business Confidence had continued to increase slowly as we had expected, although post the Brexit referendum we now expect to see a decline in overall business investment, reversing the medium term trend, particularly in the large corporate sector. Much of the previous export growth was driven by the service sector, but this has slowed in recent months and there have also been increases in manufacturing and domestic car output. Much of this activity reflected the shift in export focus from the Eurozone to emerging economies and this is likely to continue, despite fluctuating Eurozone demand (see below), although exports still remain below the long term average. The UK will remain within the European Economic Area for the foreseeable future and despite previous statements from the EU and the UK government, it is difficult to envisage a realistic scenario whereby motor vehicles would not be part of a tariff free arrangement in the future. 

Forecasts for future house price increases vary dramatically by sector and especially by geography. Despite a view expressed by the Bank of England’s Financial Stability Committee that the buy to let sector could “amplify” any boom or bust in the housing market, any negative effects are likely to be centred on London, with the rest of the country significantly more insulated from the impact of any such downturn.  

Supply Outlook

Exchange rates are a major influence on the profitability of the UK new car market and they strongly influence eventual used vehicle volumes. Sterling rates against the Euro reduced as expected from around 1.43 in November 2015, to averaging 1.26 in April 2016 – equivalent to a -12% decrease in Euro revenue for the same vehicle sale - then fell further after the Brexit referendum to around 1.16 in early 2017 and settled  at  around 1.13 during the latter part of 2017.  

As a result, new car registrations for 2017 came in at 2.54M compared with 2016’s 2.69 million, with most of that fall coming from diesel registrations (down -17.1% year on year). We expect a further fall in registration volumes, especially for diesel, in 2018. This will result in a reduction in used car supply in future years and will help to support used values.  

The UK economic situation looks likely to continue to offset any remaining weakness in the Eurozone and Sterling is set to remain at a level that should limit manufacturers’ scope for heavy discounting and forced registration activity.   

New car registrations in other key European market continue to grow as a result of the release of pent up demand.  In the three years before the financial crisis, France, Germany, Italy and Spain represented an annual combined volume of almost 9.4 million units, and have recovered to 7.7 million in 2015 and then 8.3M in 2016, suggesting there is further growth to come. Spanish growth may well slow in 2017 following the removal of scrappage incentives, but the other key markets appear to be growing steadily and vehicle lead times are expected to increase.  

4. Gold Book Methodology:

Overview

All of our future residual values are based on the gold book methodology. Our values take current month black book values as a starting point (uplifted for model changes where necessary), are moved forward according to age/sector/fuel specific year on year deflation assumptions regarding future used car price movements, and are then subjected to additional adjustments by the Editorial Team. Finally the values are moved forward by the next month’s seasonality adjustments which are differentiated by sector and fuel type and are based on analysis of historical black book movements.  

All of these assumptions and adjustments are available for scrutiny to our customers through our gold book iQ product. For years our customers have been asking for transparency in automotive forecasting and we have delivered a ground-breaking product to provide exactly that.  

With an increasing number of customers subscribing to gold book iQ, we are entering into a range of debates and discussions around both our overall forecasting methodology and individual elements of the forecasts for particular vehicles. This is expected to evolve over time into a ‘virtuous circle’, with the feedback looping back into the forecast process and delivering continuous improvement. We are embracing a new era of customer communication, with a greatly improved quality of interaction and debate around our forecast values. 

Changes may be actioned wherever there is reason to do so outside of the sector reforecast process and we continue our monthly Interproduct analysis with our black book colleagues exactly as before. This has intensified following the availability of our short term forecast data (gold book 0-12, now available to customers), which incorporates detailed exception reporting at a cap hpi ID level and will also be used increasingly going forward to manage the relationships between black book and gold book. 

Forecasting Model Development - gold book & iQ

gold book iQ was launched in December 2013 and gives unparalleled transparent insight into the assumptions used to produce our forecasts. The feedback from customers to date has been extremely positive and we believe gold book iQ will represent a new benchmark in truly market leading forecasting. More details are available here: http://business.cap.co.uk/products-and-services/gold-book-iQ

Our short term forecast product, gold book 0-12, (also marketed as black book +12) has now been launched and is available to customers. This is a live, researched product with a dedicated Editor (Rob Hester) and fills a gap in our previous forecast coverage. See link to a previous podcast http://www.cap.co.uk/en/cap-extras/its-the-saturday-morning-meeting-on-motor-trade-radio/

Following feedback on our gold book iQ product, from September 2016 we have added more detail into the commentary for each model range reforecast in sector reviews.  We will continue to review and enhance commentary in future months as we carry out each sector review. 

Forecast Output

Individual forecasts are provided in pounds and percentage of list price for periods of twelve to sixty months with mileage calculations up to 200,000.  

Each forecast is shown in grid format with specific time and mileage bands highlighted for ease of use.  

All forecast values include VAT and relate to a cap hpi clean condition and in a desirable colour.  

All new car prices in gold book include VAT and delivery. 

Parallel Imports

Particular care must be taken when valuing parallel imports. Vehicles are often described as full UK specification when the reality is somewhat different. These vehicles should be inspected to ensure that the vehicle specification is correct for the UK. Parallel imports that are full UK specification and first registered in the UK can be valued the same as a UK-sourced vehicle. 

Grey Imports

cap hpi gold book does not include valuations for any grey import vehicles, (i.e. those not available on an official UK price list). 

5. Reforecast Calendar 2018/2019:

Monthly Product	Sector 1	Sector 2	Sector 3	Sector 4
Mar-18  Apr-18  May-18  Jun-18  Jul-18  Aug-18  Sep 18  Oct-18  Nov-18  Dec-18  Jan-19  Feb-19	MPV  Lower Medium  City Car  SUV  Upper Medium  MPV  Lower Medium  City Car  SUV  Upper Medium  MPV  Lower Medium	Convertible  Sports  Supermini  Electric  Executive  Convertible  Sports  SuperMini  Electric  Executive  Convertible  Sports	Coupe Cabriolet  Supercar      Large Executive  Coupe Cabriolet  Supercar      Large Executive  Coupe Cabriolet  Supercar	Luxury Executive          Luxury Executive