Are you worried about the rising prices of used cars? Then a recent article by Autocar will offer an interesting twist to the debate. In it, journalist Jim Holder argues that the tide is about to turn.
“We’re at a curious moment for the used car market, with prices slowly but surely trending downwards despite supply being historically tight and demand reasonably high,” Holden writes, “there are now enough signs of pricing weakening for it to be a trend.”
Happy times ahead?
Let’s take a closer look.
Why do some believe prices will come down?
The Autocar article is not an analysis. It is an opinion piece. That’s an important distinction to make. There is quite a bit of freedom in interpreting the data here.
Holder admits as much. In fact, he openly acknowledges that the numbers are pinned against his prognosis:
“There’s no suggestion – yet – that the boom will end as quickly as it began. (…) While the market was always going to run out of steam, the overriding concern is of the bubble bursting. There’s no sign of it yet …”
Still, he sees a pattern in the way prices have developed over the past few months:
“Figures from the Office for National Statistics highlight falls over each of the past five months – the longest streak since 2017 – with the latest information suggesting a 2.5% fall last month alone.”
So how to explain these price drops?
For one, there is disagreement over price development.
It is interesting that the Office for National Statistics’ numbers contradict those of the car industry itself. Almost every other survey has conversely found that prices have kept rising without interruption ever since the end of 2019.
According to Carscoops, the Auto Trader Retail Price Index – which is based on the sales data of around 900,000 vehicles in the UK – has gone up for an uninterrupted 29 months without exception.
Granted, the latest rise, from July 2022 to August, was a mere 0.3%. But on a year by year basis, it still stood at 15.6% (compared to August of 2021). And it certainly showed no signs of dropping.
In fact, the prices for some models are now at near-insane levels, as the magazine reported:
“The pint-sized Peugeot 107 has seen its average asking price jump to £3,652 ($4,187), a massive 43.2 per cent increase over August 2021. Elsewhere, prices of the Fiat Punto have jumped to £4,802 ($5,506), up 39.5 per cent, the Renault Scenic is going for £7,501 ($8,600), up 38.5 per cent, and the average used Toyota Prius has a price of £15,388 ($17,644), a 38 per cent jump from August last year.”
Still, the Autocar opinion piece may have more to it than meets the eye.
Elsewhere in Europe, the market may have reached its peak.
Something interesting is going on in other European countries. Here, the initial impact of the Covid lockdown measures and the ensuing re-opening of the market had a similar effect on prices: An initial drop, followed by a wild surge.
In many of these markets, meanwhile, fortunes have reversed. Although very few of these countries are actually reporting shrinking prices, the peak is in sight. In some cases, prices are stagnating, indicating that the maximum may have been reached.
In Germany, for example, prices are no longer rising across the board. If they are still going up, the increase is either temporary or a one-off. Tellingly, cars remain on the lot longer on average. This is an indication that the days when customers would snap up just about any available car at any given price, are over.
So far, prices are not yet reflecting this. But a change is immanent.
Great cars are still extremely in demand.
Many drivers have waited a long time to get a new car and are getting impatient. Others literally have to discard their old one, as it may no longer be in a usable condition. This pent-up demand is pushing prices up.
Furthermore, supply is still far below demand for most models. This is for two reasons:
On the one hand, materials required for manufacturing continue to run low – car makers simply can not build cars for a lack of resources.
On the other hand, it sems as though they are intentionally withholding some stock because there is no incentive to do so.
How are dealers influencing car supply?
Talking about the German car market, CarScoopes quotes Andreas Geilenbruegge, head of valuations and insights at Schwacke (part of Autovista Group).
Total used car volume was running lower, he said, which ”is in part ‘due to the low motivation of manufacturers to steer the limited output that is available into the unprofitable dealer, manufacturer and, above all, rental channels.”
Many cars are also no longer being defleeted. Instead, rental companies are keeping them in action for longer. This obviously further starves the second hand car market of replenishment.
Combined, these factors are keeping supply low, which, in turn, is driving prices up.
But there is one key element that may send prices crashing.
Of course, manufacturers are free to set prices how they see fit. And it may make sense for them, at least to a degree, to charge very high prices at the risk of reduced sales volume, if this sends their overall profit soaring. In a way, after two years of desastrously low sales, this may actually be a necessity.
That said, there is every chance that things are going too far.
Every product has a critical price limit. Until cars reach that limit, people may continue to buy them even at drastically inflated prices. In some respects, they may not have a choice.
However, once you pass that critical price limit, we enter a new phase. Consumers simply stop buying the item altogether. And even reducing the price for automobiles may then be too late.
Also, inflation is almost certain to reduce the critical price limit.
Let’s now talk about an important factor in terms of the upwards price drive: Inflation.
The thing is that although car prices may well be the main driver of inflation, prices are rising almost across the board. Everything is getting more expensive, from food to gas.
This means that there is less disposable income for shouldering a major investment like a car.
So far, most of us with a limited budget have sought to counter this problem with a multipronged strategy:
Keep driving your current car or try to sell it at a very good price.
Opt for a second hand car instead of a new one.
Opt for less popular models and makes.
Look for a good financing deal, ideally with low monthly rates.
Buy less of other products or cut costs elsewhere.
However, with the war in Ukraine still raging, energy prices are exploding. Here, there is a serious shortage and no sight of relief anytime soon. As the Winter approaches, many have seen their advances rise considerably.
For some, this alone is enough of a reason to postpone the next car purchase indefinitely.
So … are used car prices going to relax or crash?
It seems unlikely at this point that prices can rise any more.
From our point of view, the current situation is as complex as it is unpredictable. Will prices rise or will they fall? Even experts are struggling to give a clear answer to that question.
One thing’s for sure: A gradual decline in prices would be best for all involved. A crash would send many dealers into serious issues and could lead to many bankruptcies. It would also mean supply of new cars would go down even more, completely ruining the used car supply for years to come.
It is in the best interest of everyone that there is no crash. There is, however, a serious threat that the onset of Winter will scare off many potential buyers for good. And when that happens, things could go from bad to worse.
The vital importance of car finance
If you need a car and have a limited budget at your disposal (and who doesn’t?), there is very little you can do to influence the price level. Sure, you can try to get a good price for your trade-in. But it remains to be seen whether that can offset the increases right now.
This is where car finance comes in. If you have to buy a car even at current levels, the best thing you can do is to spread the cost out across a longer horizon. This way, the risk of defaulting on your payments is considerably lower.
Also, what you really need right now is a finance partner who is on your side. Who understands that things are difficult, but that you have every intention of paying back your debt in full.
Car finance at Concept Car Credit
At CCC, we have years of experience in working with bad credit customers. We tailor each loan to our customers’ needs and financial capacities. Which means that the monthly rates will be at a level that you should be able to afford for many years to come.
Talk to us now and apply for car finance. You will be surprised that even in this crisis, buying a fantastic used car is still within reach.