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AS Micro: Prices for New and Second Hand Cars
9th April 2011
The prices of new and second-hand cars as measured by the consumer price index have changed in absolute and real terms in recent years as the chart below shows
New and second hand car prices
Data from Timetric.
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Consumer Price Index, UK from Timetric
The average prices of new cars have been rising in recent years but less than the overall consumer price index - so there has been a modest fall in the real cost of purchasing a new car. In contrast, there has been genuine price deflation in the average prices of second hand cars in the UK market. Note the steep falls in prices in the first half of 2009 (for second hand vehicles in particular) - a reflection of the collapse in demand and willingness and ability to pay as recession hit the UK economy.
What are the factors determining the prices of new cars?
A mixture of supply and demand factors may help to explain price movements including:
1/ Changes in real incomes and effective demand of consumers
2/ Consumer confidence and the availability of credit to finance new car purchase
3/ The actual and expected level of interest rates / unsecured credit costs
4/ The scale of price discounts on offer for new vehicles in the retail trade
5/ The supply costs of producing new cars including component costs and unit labour costs in the motor industry
6/ The degree of actual competition in the market - fierce competition tends (ceteris paribus) to keep prices lower than they might otherwise be
7/ Fluctuations in the exchange rate which affects the prices of imported vehicles and component parts for manufacturing new cars
Why have second hand car prices fallen in the UK over the longer term? Again a mixture of demand and supply-side factors may be at work:
1/ The market supply of used vehicles - for example, a rise in people trading in their older cars for new ones will increase the available supply in the second hand market
2/ The demand for second and third cars in families - affected for example by the recession and by the other costs of motoring including fuel prices and insurance premiums
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.