How long will the rental car boom last?

Over the past few months, rental car purchases have caused wild swings in the number of new registrations .  The rental car market relies heavily on the tourism industry, which has boomed over the past few years but now looks to be cooling.  For the following article we will take stock of the rental car market and recent trends.

How has it been going so far?

Growth in rental cars sales has outperformed standard passenger car sales over the past four years.  In the year to July 2017, new rental car sales [1] were up 24% from a year earlier, while new car registrations excluding rental cars were up by only 9.1%pa.  

The new rental car market is much larger than the used rental car market, meaning that registrations of new vehicles contributed to the bulk of the growth in rental car sales.  Nevertheless, first-time registrations of used cars as rentals rose a not-inconsiderable 29% from June last year.

 

How much of an effect can rental car sales have on total car sales?

Rental cars only make a significant difference to the sales of new cars.  First-time registrations of new rental cars made up 17% of total new car sales over the year to July 2017, while sales of used rental cars only contributed to 2.1% of used car sales over the same timeframe.  The contribution of rental cars to new car sales has increased over time, rising from just 11% of sales in early 2012.  

What are the drivers?

The biggest driver behind rental car sales has been the strong lift in tourism we’ve see over the past few years. Just over 3.6 million tourists visited New Zealand in the June 2017 year – over a million more people than we had visiting the country in June 2012.

With strong seasonal changes in the number of tourists coming into the country – twice as many tourists come to New Zealand in the peak summer season than in mid-winter – demand for rental cars is highly seasonal.  As a result, the strong growth in tourism has exacerbated the seasonal effects of tourist numbers on rental car demand.

This seasonality has also created fluctuations in the number of cars in the rental fleet, as old summer stock is sold off in winter months.

Looking forward, we expect growth in tourist numbers to ease, which limits the scope for further growth in rental car demand.  As opposed to 2016, when growth in tourist numbers was running in double digits, growth in visitor arrivals is expected to cool to an average below 6%pa from early-2018 to mid 2022.  To put this into perspective, we gained one million tourists in the past five years, but in the next five years we expect to make only three quarters of that gain.

What residual prices are people getting?

Rental cars are often resold within short time frames.  Recent residual price data generated from Turners’ car auction statistics showed that residual prices dropped in the June quarter.  But according to indices from Statistics NZ which correct for quality changes in cars, used car prices continued to push up, meaning that people were paying the most for the same quality of used car in the June quarter that they have spent in the past four years! In contrast, the value offering for new vehicles continues to improve, with the same quality of new car achieving even lower prices in the June quarter than in the December 2016 and March 2017 quarters.

Latest price changes for vehicles

According to the capital goods price index , prices for light commercial vehicles fell 0.9% in the June quarter, while prices for heavy commercial vehicles [2] grew by 0.7%.

 


 

[1] In this piece we use “sales” and “first-time registrations” interchangeably.

[2] Weight groups split at GVM of 3,500kg

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