Throughout the period when I was setting-up and running Contract Hire companies, both in the UK and Europe, the Holy Grail I was always searching for was an indicator, ideally completely outside the motor industry, which would somehow predict a movement in used car prices. So, if this mythical indicator moved there would be an equivalent movement in used car prices three years later. Nirvana – no more RV risk!

I have read a couple of articles recently warning of the potential for used car prices in the UK to dip, as a result of the strength of the new car market. In a similar vein, my CEO several years ago was a very experienced Contract Hire and Leasing man, who reckoned the tipping point was 2.5 million total industry volume (TIV) in the UK.

This idea that there is TIV "trigger", which acts as a method of predicting movements in used car prices, is just a way of looking for an easily identifiable statistic that foretells an oversupply and none the worse for that. Having a reliable way of predicting oversupply, or under demand, helps to avoid too much misery, so ringing the alarm bells is essential. Every country will have its equilibrium TIV level, above which the storm clouds begin to gather.

Having this high level "rule of thumb" is a sensible business precaution but it may be interesting to investigate the dynamics behind it a bit more thoroughly.

Statisticians have a wonderful expression – ceteris paribus. In English, we describe it as "if everything else remains the same", ie in a set of variables you may analyse one, assuming that all the others stay unchanged. So, if new car sales rise, the flow of cars into the used market increases and prices have to drop to compensate. This is an idealised situation, which rarely happens in reality. In practice another wonderful phenomenon occurs – elasticity of demand. Therefore, under normal circumstances, the market can fluctuate a bit to accommodate fairly modest changes, prices remain acceptably stable and we’re all happy. For a moment, though, let’s think about the reasons why the TIV may rise. There are two obvious causes:

The difference is that in the first case the bath is getting bigger, so, although there’s more water in it, the level doesn’t rise and, for as long as the bath continues to get bigger, it won’t overflow. In the second case, by contrast, the bath isn’t getting bigger, so, as soon as the water level rises, it will overflow. In other words, if the market grows naturally then, within reason, used car prices will remain stable; whereas, if the market is forced it causes an artificial bubble, which will burst, and used car prices will fall.

This is a very simple analogy; in reality it’s far more complex with the interplay of several factors, each affecting the others.

In conclusion then, TIV trigger volumes are a very useful "finger in the air" but, regrettably, they’re not my Holy Grail. There’s still nothing to beat hard graft, experience and detailed analysis. Call in the professionals.