Price Mechanism - Economics of Secondhand Car Prices

In this video we look at the economics of the surge in prices of secondhand cars.

It is a good example of the price mechanism in action where we can model changes in prices using supply and demand analysis.

Used cars dominate the market in Britain. Motorists in the United Kingdom bought some 10.3 million cars in 2019, almost eight million of which were used cars.

Although most transactions involving second hand cars now start with an online search, the majority of used cars are still bought and sold through dealerships But there is change afoot not least with huge investment in a raft of new e-commerce online second hand car businesses such as Cinch, WeBuyAnyCar and Cazoo.

But something quite remarkable seems to be happening right now in the used car market

Research by the motoring group the AA suggests the price of the UK's most popular cars have increased up to 57% since 2019. The average asking price for used cars has shot up 15.2 per cent year on year, resulting in a sudden gain in value for most vehicles, according to Auto Trader, an automotive advertising business.

Normally cars start to lose value as soon as you drive a new car away from the dealer’s forecourt!

The pace of the price increases mean that some used cars have gained in value despite getting two years old.

For example, with some used car models in strong demand, a five-year-old model currently costs 15 per cent more than a three-year-old car did in 2019.

Why are secondhand (used) car prices rising?

• The main reason is rising demand for new cars that cannot be met by car manufacturers
• This is leading to a rise in new car prices on the forecourts
• Secondhand cars are a substitute to buying a new vehicle
• Many are delaying buying a new car and looking for a nearly-new car instead
• Some car rental companies are now buying nearly-new cars in bulk
• This causes market demand for used cars to increase
• For a given level of market supply, this causes prices to rise because it becomes a sellers’ market (where sellers can negotiate a better price)

Why are prices for new cars rising?

• Surge in market demand following the end of lockdown restrictions – releasing pent-up demand that built up during 2020 (many have high savings)
• Many people appear reluctant to travel on public (mass) transport
• More people are now working from home and need a car during the day
• Supply problems affecting car manufacturing
  • Global shortage of computer chips used in car production
  • Shortages of and rising prices for copper, aluminum and cobalt
  • Higher prices for other key components due to Brexit-related delays
  • Some temporary shut-downs of car plants has limited output

The second-hand car market is a great example of inter-relationships between different markets. Used cars are a substitute for buying a new vehicle. When prices of new cars are increasing, some buyers will decide to purchase a used vehicle instead.

But there are big information risks involved!