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 prerecession 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 subvene it deeper or you're going to see lease price points creep up," Dominique told Automotive News.
Forecasted industrywide 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."