Plan Insurance Blog

Will The Used Car Price Bubble Pop?

‘Your car loses its value as soon as you drive it out of the showroom’. Not any more… The meteoric rise of used cars have reached such heights that nearly all used cars are now the same price as new ones. Where do we go from here?

Whatever their previous opinion on used cars, if they’ve wanted a car in 2021 – buyers have mostly had to opt for one.

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Are car values now increasing when they leave the showroom?

We’re now at a stage where one-in-10 ‘nearly new’ cars are more expensive than their brand new equivalents. Even uninformed consumers have heard the phrase, ‘cars lose their value the minute you drive them out of the showroom’. Well we’ve potentially reached a point where that largely is no longer true.

Car manufacturing issues stemming from the scarcity of parts (mainly the semiconductor microchips and the effects of the pandemic) has meant that new cars are scarcely available. For a full explanation, read June’s blog here.

Much of the conversion to used cars stems from the fact many people aren’t buying new cars because they can’t, not a sudden preference for nearly new. People need cars, so are buying the best quality ones they can get their hands on.

Affordable cars are few and far between

As interesting as the top of the market is the bottom. Cars are now less affordable for those who would normally only buy second hand. This has likely impacted many who were forced to avoid public transport during the pandemic and didn’t already have a car.

This isn’t helped by the fact that people aren’t trading in their old cars as frequently as before, as they can’t easily replace old cars with new ones. This further drives up the price of second-hand cars, as stocks remain limited and quickly depleting

A recent report by the AA revealed that average prices of a host of the UK’s most popular second-hand cars have increased by nearly 60 per cent in just two years. The most popular vehicle on these shores, the Ford Fiesta experienced from the period of 2019 to 2021, an the average rise for three to five year old models of 31% to £9,770.

The cause is obvious.

This rise in second-hand cars is intriguing even those outside the trade. However, it doesn’t show us anything that couldn’t have been predicted. Just like gold and land, things of limited supply with a surplus of demand are going to go up in price. In June 2021, the amount of available new cars was just 46% of what it was just in June 2019. Essentially, in a nut shell that is the main reason why cars are now more expensive.

Are prices at their peak or will they keep climbing?

I have written about this several times over the last year. Every time I write my opinion on the price of used cars, I write something like ‘Last time I said these are the highest prices I have ever seen, but they’re now even higher’.

But if there suddenly is an endless supply of new cars, or at least enough to fulfil demand, the ‘second-hand car craze’ sweeping the nation will certainly falter. Whether the bubble will burst or slowly deflate will depend on how quickly manufacturers release new stock. Typically they have prioritised selling new units over used car values. So you’d expect in most cases for new cars to be pumped out as fast as they can produce them.

Writing on the subject in Car Dealer Magazine James Litton highlights that, “Even if the demand cools and supply starts to ease, there is huge potential for a strong growth in inflation because of increased transportation costs, wage growth and the need for OEMs (Original Equipment Manufacturers) to strengthen balance sheets resulting in a big price rise in new cars.”

And a top analyst firm says that the global chip shortage won’t end by 2023. In fact, many believe we are gearing to be oversupplied by that time. I’m sure that will be very unpopular with used-car dealers and a great relief for buyers and car manufacturers.

One segment of the market that probably won’t look back is used battery electric vehicles. Stock turn around time in September was reportedly a third higher than in August and a huge 87% increase year on year. The crisis has perhaps helped overcome buyers concerns regarding the battery life and convinced them to make the jump.

Used car price experts Cap HPI commented on their blog last month that demand is likely to remain at current levels thought they don’t commit to a timeframe. Demand may even increase if, “consumers decide to seek out a used car rather than wait months, potentially into next year, for a new one to be delivered.”

Their thoughts are that even if demand dips due to financial hardships caused by the furlough scheme ending, “There would not be the supply levels available to cause any crash from current high values.”

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