Low-cost monthly auto leases will become more expensive over the next couple of years, predicts ALG President Larry Dominique.
That’s because the supply of used light vehicles — especially those 3 to 5 years old — returning to the market will rise significantly, lowering used-vehicle prices and residual values to pre-recession levels.
The decline has started. Residual value forecasts peaked in the 2013 model year. Since then, they have fallen an average of 1.5 percentage points for luxury brands and 2.0 points for volume brands, said Dominique, who forecasts further drops of 2.0 points for luxury brands and 1.8 points for volume brands by the 2017 model year.
One reason: Luxury brands, having added smaller, less expensive vehicles to their lineups, will have an “unprecedented high number” of used off-lease vehicles returning to the market over the next five years, he said.
“It’s going to cost them more to lease at the same rate because as residuals drop, to keep the same lease price point they’ll either have to incentivize it deeper or you’re going to see lease price points creep up,” Dominique told Automotive News.
Forecasted industry-wide residual values “peaked at about 50 percent, and are expected to return to historical 45 to 46 percent levels,” he said.
Though he predicts that the higher monthly lease payments still will be lower than the monthly payments associated with a finance contract, “it’s definitely going to bring the payments closer together, which could limit their ability to lease.”
Typically, monthly lease payments are lower than monthly loan payments for the same vehicle because the financing institution doesn’t charge for the vehicle’s residual value — the amount it is predicted to be worth at lease end.
Lower residual values mean that either manufacturers or consumers will have to pay more to make up the difference. Automakers increasingly have relied on leasing to offset higher sticker prices.
In 2007, before the recession, 2.6 million vehicles were retailed through leases, according to ALG data. Leasing dropped to 2 million in 2008 and to 1.2 million in 2009, during the worst of the recession when overall retail sales plunged.
The resulting tight used-vehicle inventories sent used-vehicle prices soaring to historical highs starting in 2010. They still remain elevated, according to Manheim’s Used Vehicle Value Index, but Dominique and other used-vehicle analysts predict that will change.
ALG forecasts that the overall supply of used vehicles up to 5 years old will increase almost 10 percent to 10.4 million this year and grow another 10 percent to 11.6 million in 2016.
Leasing is still going strong. This year, ALG predicts, 3.3 million vehicles will be retailed through leases. That is expected to grow to 3.4 million in 2016 and 3.5 million in 2017.
Dominique said the additional volume will pose challenges for many manufacturers and dealers.
Managing the large volume of used vehicles coming off lease “is something brands like Hyundai aren’t used to doing,” Dominique said. “Disposing of vehicles for them is a bigger challenge than for companies like BMW that have been doing it for decades.”