new gold book editorial May 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

Newsflash: Communication of forthcoming changes to sector deflation assumptions

We intend to commence a review of our sector and fuel type deflation assumptions, starting with the SUV and Electric sector reviews to be published in June. 

Further information, including a high-level advance warning of the size of the changes to the assumptions, will be available as early as possible in May on an updated version of the gold book editorial section of our website, and a link will be available on the cap Extras section of our website.

Newsflash: Improvements to forecast accuracy calculations and reporting

Starting this month, our new car forecast accuracy results have been recalibrated and enhanced, to give improved insight and learning. All averages are now weighted, based on the registration volumes of each model in the month that the original forecast was made. This has been applied to historic data so that all trend charts now reflect this weighting.

In addition (although not included in this editorial), trends have now been also been created for individual manufacturers and model ranges; and also for 10,000 mpa forecasts as well as 20,000 mpa forecasts. These can be made available on request. Future planned enhancements include trends by fuel type, and the spread and  standard deviation of accuracy results.

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 generally within this target since launch.

The unexpected growth in strength of petrol car values through 2017 and into 2018, as a result of anti-diesel press,  has resulted in our recent accuracy results showing a more under-forecast than was previously the case, especially in the City Car and Supermini sectors. We expect this position to correct over time due the sector reforecasts made in 2017, and our expectation that petrol strength will start to diminish as petrol values peak and more used petrol volume comes the market.

The results of our longer-term forecasts from 3 and 4 years ago have so far shown more under-forecast than the results of our shorter-term forecasts from 1 and 2 years ago. This is largely because the impact of changes made in previous sector reforecasts take longer to flow through into our accuracy results.

12 month results

Since measurement started our 24 month forecasts have averaged -0.1% less than black book across all vehicle ids, and the most recent results show April 2017 12/20 gold book forecasts being -4.7% less than April 2018 12/20 black book.

Split by the main vehicle sectors, most of these have been within target for the majority of the reporting period, except for City Car which was initially over-forecast as a result of unforeseen and prolonged excessive forced registrations, and more recently some sectors have been under-forecast due to the unexpected strength of petrol values in recent months.

24 month results

Since measurement started our 24 month forecasts have averaged -0.9% less than black book across all vehicle ids, and the most recent results show April 2016 24/40 gold book forecasts being -5.0% less than April 2018 24/40 black book.

Split by the main vehicle sectors, most of these have been within target for the majority of the reporting period, except for City Car which was initially over-forecast as a result of unforeseen and prolonged excessive forced registrations, and more recently some sectors have been under-forecast due to the unexpected strength of petrol values in recent months.

36 month results

Since measurement started our 36 month forecasts have averaged -5.0% less than black book across all vehicle ids, and the most recent results show April 2015 36/60 gold book forecasts being -7.2% less than April 2018 36/60 black book.

Split by the main vehicle sectors, most of these have been outside the under-forecast target for the majority of the reporting period.  As previously stated, this largely due to the unexpected strength of petrol values in recent months, which was not foreseen when setting forecasts 3 years ago.

48 month results 

Since measurement started our 48 month forecasts have averaged -8.9% less than black book across all vehicle ids, and the most recent results show April 2014 48/80 gold book forecasts being -8.8% less than April 2018 48/80 black book.

Split by the main vehicle sectors, most of these have been outside the under-forecast target for the majority of the reporting period.  As previously stated, this largely due to the unexpected strength of petrol values in recent months, which was not foreseen when setting forecasts 4 years ago.

Overall results

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:

Alfa Romeo Stelvio Quadrifoglio, Mercedes-Benz C-Class and Renault Megane R.S.

There are numerous additions to the following model ranges: 
Citroen C1, DS DS3, Fiat 500, Fiat 500C, Ford Fiesta, Ford Galaxy, Ford Mondeo, Ford S-Max, Jaguar XE, Lamborghini Huracan, Mercedes-Benz S-Class, Nissan e-NV200, Peugeot 108, Peugeot 2008, Peugeot 208, Peugeot 3008, Peugeot 308, Peugeot 5008, Renault Captur, Renault Clio, Renault Megane, Seat Alhambra, Smart FourFour, Smart FourTwo, Suzuki Swift, Toyota C-HR and Vauxhall Grandland X.

Sectors reforecast this month

This month, we publish our most recent reforecasts for the City Car and Supermini sectors.

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

We have not changed our future market deflation assumptions for these sectors, so the forecast changes are driven by changes in black book values since the last reforecasts 5 months ago. 

The underlying forecast changes reflect the strength of the current market and associated black book values. 

Note the City Car Diesel sector has now comprises of only two model ranges, Fiat Panda and Fiat 500.

Other forecast changes this month 

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

Reforecast outside of scheduled sector cycle, following inter-product analysis of black and gold book values

• Mazda CX-5 petrol and diesel
• Suzuki Jimny

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 -1.6% at 36/60, which is in line with normal expectations of the seasonal change for full year forecasts between April and May.

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

3. Market Overview

Brexit negotiations continue to progress, but the final outcome will still not start to become clear for some time. However, 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 February 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. In April 2018 we saw the implementation of 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. Both of these changes are likely to further discourage new diesel registrations, which are down 33% ytd in 2018 (up to the end of March)

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 to 0.5%, and the possibility of a further increase, 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 has recently fallen back a little and is now at +2.5%, which still exceeds the Bank of England’s lower limit of +2%. RPI is at 3.3%.

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 Q4 2017 are +0.4%, 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, where they remain.

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. Our view is that total volumes will fall by around -3% to -4% compared to 2017, and 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, then 8.3M in 2016, and then 8.7M in 2017, suggesting there is still further growth to come.

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