Plan Insurance | Are Used Car Prices Set to Drop?

Car dealers have been enjoying some of the best times for used car prices but are we on the verge of the fastest crash ever?

Over the past two years, used car prices have risen more than we have ever seen. People in the car industry are using words like ‘shocking’, ‘crazy’ and ‘unprecedented’. In 2019, everyday cars like Fords were readily available and (really) unremarkable. Today, these (good) cards are some of the most sought-after cars on the market.

Some types of second-hand cars are up to 70% higher than before the pandemic. The Toyota Yarris, for example, now costs 69% more than it used to. Hundreds of other models have followed the same pattern. There have been many stories of car dealers selling cars to buyers, only to offer to buy the car for resale at a later date.

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How can a used car cost more than a new one?

There is a huge backlog of new cars due to problems with the supply chain. This means that new cars are not entering the market at the rate they once did. Due to the lack of new cars, the cost of selling new cars became irrelevant. If a seller puts something at a new price but can’t meet demand, then the price of the remaining stock (i.e. cars) rises to meet demand.

Used cars are few and far between, as the used car market relies on people buying and using new cars. Without a source of new used cars, the prices of good used cars that were available rose rapidly.

It’s a supply and demand problem that doesn’t seem to be getting back to normal anytime soon. As a result, ‘like-new’ cars are going for more than new cars that were sold a few years ago.

Prices don’t seem to be going down, but they aren’t going up either

Statistics show that used car prices are still 15% higher than they were this time last year, but have been quietly falling for the past six months. Drops were recorded across the board, with independents seeing the biggest drop, down 1.2 percent. Retailers were down 0.8 percent and auto majors were down 0.7 percent.

Used car prices are also falling

Stock levels, which have been steadily declining since April when they averaged 46.8 units, fell slightly month-on-month from 44.8 to 43.2 units. However, they remained four percent ahead of last July’s 1.5 units.

Independent sales totaled 34 units, down from 36 in June but up nearly 10 percent year over year; while the average number of units received is 51, compared to 53 in June. The car dealership remains the same at 282 units.

What will happen to the used car market in the next 12 months?

Many have been whispering about the ‘collapse of car prices’, similar to the boom that has hindered the housing market throughout history. However, some car dealers think differently.

Traffic is still limited. If this changes, will it be fast enough for the decline in used car prices?

Experienced and knowledgeable people from the auto industry believe that prices could not have fallen as fast as they have risen. In the case of an emergency that some anticipate, a large number of items are needed. This seems impossible, since millions of new cars from the epidemic must be fulfilled.

We are close to having enough new cars to satisfy the expectations of customers, let alone flood the market with products that will drive down prices. Walking into a car showroom and driving a new car from the front yard may not be the future.

Used Car Depreciation Takes years, not days

Traditionally new cars lose 30% to 40% of their value in the first 12 months. In fact, the price of used cars has been increasing by about 30% per year. Based on these numbers, even with month-to-month declines, it will take years for used cars to drop to prices that would have been normal before the pandemic.

Another issue is that 50% of new cars are purchased by fleet and rental companies. These cars come to the used car market after several years of use. Because new cars aren’t being bought by the fleet, high quality used cars aren’t coming on the market as much as they used to.

Falling prices only come with more supply and less demand. An easing of the auto industry’s crisis seems unlikely anytime soon. However the cost of living crisis could see demand drop significantly in the coming months. So, as we have learned in recent years, we must prepare for the unexpected because it is difficult to recognize.

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