How are residual values set on used cars?

I have been wondering for some time how residual values are set? Obviously there are used car price guides (for the consumer and the trade) but who establishes the prices in the first place, and how? I'm quite sure there's an element of supply and demand, although surely the predicted residual values could influence the demand, rather than react to it?

Asked on 18 August 2015 by martin tonbridge

Answered by Honest John
Several groups of experts at CAP, at Glass's Guide and a few other places make predictions based on the past behaviour of prices of a brand and model, adjusted by what they consider to be value enhancing features of the new models. But it's all thrown into chaos by the fact that residuals are based on new car list prices, yet new cars can be bought at anything from a 40% discount to a 20% premium due to the number of optional extras specified. That makes the average residual for something like an Audi A6 a lot higher than for a Mondeo, but anyone who bought a Mondeo at a 30% discount would probably lose a lot less hard cash over 3 years than someone who over-specced an A6.
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