The used car market is very competitive at the moment with prices at a historic high. So it’s a reasonable question to ask whether inflated used car prices will continue in a few years’ time.
Anyone buying a used car now for an apparently inflated price is unlikely to make a loss (over and above expected depreciation) when they come to sell it. But to understand why that’s the case, we need to understand why the prices of used cars are high in the first place.
Used car prices are driven by new cars
The used car market is dictated by new cars. If there’s a shortage of new cars, a percentage of people switch to buying nearly new used cars. This demand for used cars pushes their prices up.
The perfect storm
The pandemic has caused a perfect storm to increase used car prices. Various lockdowns in 2020/21 caused many car factories to stop or cut back production. This meant when dealerships opened again during the tail end of the pandemic, there was insufficient supply for the pent-up demand of people wanting new cars.
On top of that, the pandemic has resulted in a terrible shortage of semiconductors, the computer chips that control everything from fridges to games consoles and cars. This has caused continuing shortages in new cars, which has prompted used car prices to continue rising.
What will happen to prices going forwards?
Let’s assume the supply of new cars returns to normal tomorrow. In three years’ time there will still be a shortage of three to five year-old cars (the new cars that were affected by the pandemic and semiconductor shortages).
Obviously the cars’ prices will have depreciated but they will remain strong relative to other used cars because there won’t be as many in the age group as the market is demanding. It’s the same story with todays used cars that then will be five to eight years old.
It’s worth adding that the shortage of semiconductors is unlikely to stop tomorrow. Experts are forecasting that it’s going to continue until 2023 at the earliest so used prices are likely to remain buoyant.
The move to electric vehicles will have an impact
The sale of new combustion engine cars will stop in 2030. According to Philip Nothard from analyst Cox Automotive that will drive the value of petrol and diesel cars up.
He said: “The transition to EVs is happening very quickly. There will be increasingly fewer combustion engine cars built as manufacturers switch to EVs. By 2028/29, there won’t be many new non-EVs on sale. But there will still be demand for petrol and diesel cars. That means we will see prices of used combustion engine cars going up, or at least holding their value.
“But this does depend on the charging infrastructure. If that suddenly gets better and makes the move to EVs much smoother than it’s looking currently then things might be different. But there’s no sign of that happening at the moment.”