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Why are used car prices rising?

Mann Island

25 Jun 2021 2 minute read

There can be no doubt used car prices in the UK are rising, and it is a trend that shows little sign of slowing down and is occurring in other mature markets, including the USA and Germany. Double-digit increases in used car prices over recent months are common.

To put some real-world numbers on it, in early June, online retailer reported that its average used car-selling price rose from £13,108 in January to an all-time high of £15,399 in May.

So, just what is driving this rise?

In short, it is a perfect storm of several factors:

Shortage of New Cars

A global shortage of essential semiconductors required in the manufacture of new cars is hurting new car supply. Rather than wait for an extended period to take delivery of a new car, some people are switching to a used purchase, driving up demand.

However, this is only part of the picture; the lack of new car sales in the year following the pandemic has meant that the supply chain of used cars has diminished. The shortage of new cars last year and the delays in bringing new cars to market now also mean that the supply chain will be lower than usual in the future. The current shortage will not be going away any time soon.

The COVID-19 Factor

During the pandemic, fleet purchasing slowed notably as businesses reined in their spending. Rather than buying new cars and vans, they extended contracts. Here again, this has restricted supply.

Many people who previously used public transport switched to a car to avoid the inevitable crowded spaces. A new cohort of people were added to the demand side of the supply/demand equation. It seems likely that this demand may well start to ease but moving back to public transport may not be for everyone as the concerns around COVID-19 and new derivatives continue.

Another COVID factor is the reality that many people have money to spend. Limited in their spending options, saving levels in the UK hit all-time highs. Now, people want to spend some of their savings.

The ‘Safe-Haven’ Value of Used Cars

In times of turmoil, people have turned away from new cars and towards the used sector. There is an inherent better-value equation to a used car, primarily linked to the lower purchase cost and continuing confidence in today’s cars’ reliability and safety. We saw during the financial crisis of 2007/2008 that such frugality gained an almost ‘tatty chic’ appeal.

So there we have it, a shortage of supply and plenty of demand. It is a combination that will see prices stay high for the foreseeable future.

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