Second-hand cars. These guys have been the silent winners of the pandemic. When we couldn’t quite get hold of new cars (unless we wanted to wait 12 months+) thanks to lockdowns and complete shutdowns of factories across the globe so we flocked to this market, the likes of which have never been seen before.
Pre-covid, you would drive outa the showroom in your fresh wheels and right there, in that instant, you’d have lost anywhere between 15-35% of your car’s value and over the next three years, you’d lose north of 50%. Not quite an asset, eh! But covid spun this beast on its head. And used car prices started to rev. And rev some more. Why? Cuz you couldn’t get hold of a new one! This once-was-a-non-asset changed its coat and began to look a whole like an asset and not a money-draining, depreciating thing.
In my first year of uni, while sitting in a biz class, I learnt all about adverse selection (where either the seller/buyer has more info than the other) and how it applies to the used car market. Cut the story short – if you’re selling a perfectly new car it must be because there’s something wrong with it. That it’s a ‘lemon’. Hence the instant depreciation. But when covid broke out, this market suddenly lit up. For the first time used cars weren’t lemons!
Back To Basics: Supply and Demand!
At the end of the day, every price problem (or nearly every one) comes down to the basics: supply and demand. When the two are outa sync (or in a state of disequilibrium) that’s when prices start to go a bit wonky. You either get higher prices: the result of low supply, high demand, or both or you get lower prices thanks to an oversupply or depressed demand, or both. And guess which scenario we had during covid. Yup folks, it was the first! We not only endured whopper supply chain issues (that are still raging btw) but we also faced rising demand.
When covid seriously started spreading, entire economies began to shut down. Supply for many things ground to a halt. Factories that were once bustling with thousands of people turned into ghost towns. Suppliers and car dealerships shut down and we went into a recession. Automakers cancelled orders as quickly as they could. After all, no one could have guessed the whopper pent-up demand that would follow! Many thought we’d end up in something a whole lot worse than a recession.
So, when factories eventually re-opened this was met with a gigantic gulf of demand for new cars. We had cash and we wanted to splash. Simple as that. Only one snag: supply couldn’t keep up with all of our demands. Building a car from scratch ain’t as simple (or quick) as turning the lights back on. Car parts come from all over the world. And before you know it, our supply chains got clogged up and getting a new car would take you months, if not years!
I headed straight to auto express to see how long you’d have to wait for a new car:
Kia: 8-16 weeks
Ford: 3-7 months
Dacia: End of August
Land Rover: 6-12 months
BMW: 20-24 weeks
It’s no wonder then that people have turned to used cars. Waiting over a year for a car is simply crazy but kinda feels like our new normal, no?
My friend pre-ordered a new car but was told delivery would only be fulfilled in the next 4 months since they’re waiting for chips aka that key ingredient the whole world suddenly realises they need. And it’s not just any bog-standard chip. It comes all the way from Shanghai. And that chip is about the size of a quarter! This tiny bugger is causing a migraine since they’re eaten by everyone from iPhones to fridges and, yeah, cars. Hence the fight for ‘em. And my friend’s long wait for her car!
And she’s not the only one who spent big this year. We all did. And ever since the pandemic began, I’m seeing loads more flashy new cars on the road than ever before. My fam is a bit car obsessed so I can safely say I’ve spotted an Aston Martin DBX, a McLaren (don’t ask me the model) wrapped in gold along with a white Rolls Royce that stood out a mile away and a handful of other cool cars.
Pre-covid, I’d have been lucky if I saw one or two. Now they’re everywhere. Brand new cars are roaming the roads. So much so that Fords, Citroens ect stick out like a real sore thumb. But don’t worry cuz if I’d be buying a car (which I most definitely am not), I’d pick one of those bad boys. No way would I spend north of £20k for a car. No siree. But so many people have upgraded their wheels which got me thinking: is there steam left in the engine? Are people still willing to splurge on a car given all that’s going on? Or has the covid-induced splurge plateaued?
What Goes Up Must Come Down
There are many reasons why we’d hold off from such a hefty purchase. First up: Inflation. It’s high, now ~8.5% (read here how to protect your money) and we’re not feeling too good about our future prospects. Consumer sentiment is approaching its lowest level since ’08. Not a good sign. Though what with this war in Ukraine, I’m not surprised.
Then, to try and combat inflation, the Fed is set to raise rates this year. Not once but several times. Car loans (aka where the real money’s at!) are slowly rising which makes a car an even bigger luxury since it’ll eat up a far larger portion of your money and will represent more of your monthly expenses. Consumers have to make sure that they can cope with this rise in monthly expenses along with everything else that’s going up.
For many, a car is a luxury, for others it’s a necessity. If you’re in the second camp, check out how much your car could fetch. If the price is enticing enough, selling now could be a wise move.
Case in point: my friend’s car (a 2021 model) has gone up by 13.5% since she’s bought it but she’s not sure whether she should sell it now or wait till supply chains get even more clogged up. Hint: the car value has already lost £1,000 since she’d been to-ing and fro-ing. She decided that she’s going to sell it now since she could do with the extra cash and the profit on her car will be used to buy a cheaper model. Plus, she doesn’t feel comfortable with such a big bill over her head when energy prices are as high are.
But you can’t time anything. So sell when you’re ready and when the price is good enough, for you. And you only.
No one knows what the future holds but being light on liabilities from car loans to credit card debt will certainly help you steer the ship no matter the waters.
After all, debt is like a multiplier. It will multiply the good – and the bad. And if the bad really does happen, you want to be preparped.
And nothing says preparedness like some extra cash on hand!
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.