Why used cars are suddenly so expensive

Used car prices rose by 40 per cent in the last 12 months, according to a new report from online advertising website DoneDeal.

Figures compiled by economist Tom Gillespie, based on the website's listing over the last 10 years, showed that, after controlling for mileage, age, and other vehicle attributes, used prices held up so strongly during the pandemic that they offset the traditional depreciation.

The 40 per cent inflation rate is a remarkable figure, but before you decide to invest your savings in a 2012 Ford Fiesta, hoping for a healthy return, the devil as always is in the detail.

According to Dr Gillespie: “The inflation rate of 40 per cent is a headline figure; it’s not necessarily that a car is now worth 40 per cent more than last year.” He says that, like the consumer price index, the report was comparing, for example, the price of a one-year-old Golf last year with that of a one-year-old Golf this year.

Renault sales fall more dramatically than market during Covid

---

The Lisburn woman in the front seat of Ford’s latest transformation

---

Spend on a new car or save by buying used? Here’s our expert advice

---

There were 187,000 new cars registered in 2007, but between 2009 and 2015 annual registrations didn't exceed 100,000

It also worth noting that the percentage rise in the values of older cars priced at under €4,000 is more significant, with those cars experiencing a rate of inflation of 104 per cent year-on-year. This compares to cars priced at more than €20,000, where the inflation rate increase was 15 per cent.

Supply and demand

As the report outlines, used car prices are driven by the basic economic law of supply and demand. And the supply of used cars on the Irish market has been hit by three factors.

First and foremost, the number of new cars registered in Ireland dropped dramatically from 2009 onwards. There were 187,000 new cars registered in 2007, but between 2009 and 2015 annual registrations didn't exceed 100,000. This is the key supply line for the used car market.

Simply put, the drop in new car registrations during the recession is now limiting the supply of seven to 12-year-old used cars. That is a critical vehicle age demographic for the Irish fleet. According to the Department of Transport, there are 2.2 million private cars on the road. Of these 1.3 million – 60 per cent – are six-years-old or older.

Used imports

To fill the gap in supply, many motorists and dealers turned to the UK market and brought in used imports, particularly when sterling’s value came close to the euro. That supply line has been curtailed by the new Brexit regime and Covid-19 restrictions.

However, it has not entirely switched off. Used imports so far this year are down by 35 per cent on the same period in pre-Covid – and pre-Brexit – 2019. That’s substantial, but it still means that 65 per cent of that traffic is still taking place this year, despite the ongoing Covid restrictions and Brexit-related paperwork and charges.

Very old cars which have reached their end of life and should be scrapped are in demand

Finally, in the new car market, global supply issues with semiconductors are causing major delivery delays. Anecdotally, some new buyers are turning to the used market as an alternative.

As for demand, that’s being driven partly by the increased savings of many consumers whose incomes were unscathed by the pandemic. At the same time their options for spending on foreign travel was curtailed. So they now have greater budgets for big-ticket items like a home or car.

Cost of change

Before we get too excited about the potential rise in the value of your used car, a lot of this could be academic when it comes to your next car purchase. After all, if you’re trading in one used car for another, then both prices will be holding up strongly and the ultimate net cost of change is unlikely to deliver much net benefit.

Where there might be more room for manoeuvre is when someone is trading in a used car for a new one. It’s in these instances where the stronger used car value could reduce the cost of change and benefit the consumer.

As Dr Gillespie explained, it doesn’t necessarily mean that a car is now worth 40 per cent more than last year, but it should result in you getting a stronger trade-in value for it than you would have this time last year. The critical figure to watch in all car deals remains the cost of change.

One consequence of the rising used prices may be that older cars are kept on the road longer. According to Denis Murphy, manager of Blackwater Motors in Co Cork, "very old cars which have reached their end of life and should be scrapped are in demand", he says and it means a spike in used prices is "bad for safety and very bad for emissions".