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Why are used car prices so high and when will they come back down?

With new car shortages and people's driving needs changing, there has been a notable shift of new car buyers turning to the used car market

For all of the attention that the motoring media lavishes upon new cars, it’s quite removed from what actually goes on in the real world. Just one in five cars bought today is new, while the remainder of car buyers are buying a used car.

With car companies struggling to build new cars at the moment (a situation that’s unlikely to improve for the rest of this year), many new car buyers are now unable to replace their current vehicles with another new car. As a result, they’re now looking at the used car market for an alternative – and that’s driving up prices.

The outlook for new machinery doesn’t appear any better for at least the rest of this year, either. The global shortage of semiconductors, the microchips used in cars to run infotainment displays and safety control systems, has led to huge cuts in production. Many car manufacturers are quoting months-long waits for almost any new car.

It could get even worse. Now the car industry is starting to be affected by parts and materials supplied from Ukraine and/or Russia as a result of the Russian invasion and the associated sanctions on Russian companies.

New cars are stalling

With online car sales gaining far greater consumer confidence, ongoing new car production shortages and people’s driving needs significantly changing as a result of the pandemic, there has been a notable shift of new car buyers turning to the used car market.

Last year, the number of used cars changing hands grew by more than 11% over 2020 figures. That’s more than 7.5 million second-hand cars, according the Society of Motor Manufacturers and Traders (SMMT).

That has carried into 2022 and, as the electric vehicle (EV) revolution continues to gain pace, there was a record demand for used battery-powered cars – they rose 119% with more than 40,000 transactions.

Of course, a used car can be anything from an old banger that has been passed down within a family for free, to a near-new luxury car that’s barely a few weeks old, so it’s a very wide spectrum of vehicles and values.

New car sales figures, on the other hand, ended up at a bit over 1.6 million registrations in 2021. That was up very slightly on 2020 – a year that was decimated by Covid forcing the car industry to shut down for months on end – but nearly 30% down on the years immediately prior to the Covid pandemic.

Car sales, looking at 2021 as a whole year:

Used car transactions 7,530,956
New car registrations1,647,181
Total car sales9,178,137
New car percentage of all transactions17.9%
Source: SMMT

The car leasing industry, which is almost entirely reliant on new car business, is certainly feeling the effects of the current production shortages, but personal contract hire (PCH), a form of leasing, is only used in just over a tenth of new car deals anyway. Most consumers purchase new cars using PCP car finance (see below).

“In the current climate, you have to consider availability – someone who may ordinarily have opted to lease a new car could ultimately have chosen a different product in the used car market because that was the pragmatic choice at a time when supply issues would have delayed delivery of a brand new vehicle,” says Adrian Dally, director of motor finance at the Finance and Leasing Association (FLA).

“Supply issues aside, leasing accounts for around 11%-13% of point of sale finance in the new car market, and has remained at this level for some time, whereas PCP accounts for around 80% and has even eclipsed hire purchase as the product of choice in the used car market.

“The PCH/PCP split may change over time as customers embrace the next generation of EVs, but for now, PCP’s flexibility is what underpins its popularity.” 

A shortage caused by forced turnover

The vast majority of consumer car purchases are financed by a type of car finance called a personal contract purchase (PCP). It accounts for about 80% of new car sales and about half of new car sales.

The key feature of PCP car finance is that it consists of low monthly payments followed by a massive final balloon payment. Since most people don’t have thousands of pounds available to make the final payment, they are effectively forced to give the car back or part-exchange it, and take out another PCP on another car.

So despite a shortage of cars, there are still millions of customers who basically have to change their cars – simply deciding to keep their current car for another six months isn’t an option for them. This factor alone is what’s keeping sales turnover up across the country, despite a lack of available new cars.

With no new cars in stock, car buyers are effectively being forced to pay vastly inflated prices for a used car just so they can keep driving. Great news for car dealer profit margins, but bad news for the customer.

Knock-on shortages for the used car market

Shortages for new car supplies have a knock-on effect in the used car market. A lack of new cars right right now inevitably means a lack of near-new used car stock for the next year, and shortages of 1-3 year-old cars for the next few years.

Most used car retailers are reporting a combination of high demand and low stock, which is pushing used car prices to record levels. Car companies have spent the last two years with factories regularly being shut down, firstly due to Covid and then due to supply shortages, so that’s two years of relatively few new cars hitting the marketplace.

If new car production doesn’t return to near-normal levels until the end of this year, which is what appears likely, we’re looking at nearly three years of reduced new car production. That, in turn, will mean used car prices remain high – although maybe not as high as we’re seeing right now – well into 2023.

Stock shortages mean no discounting

Most people are wearily familiar with the pricing games playes by car manufacturers and car dealers. There always seem to be discounts, “exclusive” offers, finance incentives, freebies and other tactics to lure customers into showrooms.

But car pricing is driven by supply and demand. If dealers have too many cars and not enough customers, they start dropping their prices to get rid of them, and the car industry has been oversupplying the market with new vehicles for years, leading to perpetual discounting. This discounting can be in the form of a reduction in the price of the vehicle and/or a reduction in the interest rate to finance the car.

With high demand and no supply, there’s no incentive to reduce prices. If a dealer doesn’t have enough cars to meet customer demand, why would they offer any discounts? So car prices are higher, interest rates are higher and there’s no discounting – if you got your last car on a PCP with a decent discount and a low interest rate a few years ago, you’re going to get a major shock when you see how much an equivalent model is going to cost you each month in 2022.

Inevitably, there are still some deals around, but they are fewer, further between and less generous than you’d normally expect to see on new and near-new cars.

Are car dealers profiteering?

Car dealers certainly have little incentive to discount their cars at the moment, but that doesn’t necessarily mean they’re ripping you off (some certainly might try it, but that’s nothing new).

Other than a lack of discounting, the main reason you’re paying more for a used car right now is that the dealer is having to pay more to buy that car in the first place. Trade auctions have become feeding frenzies for car dealers, desperate to secure enough vehicles to meet customer demand.

Thanks to the internet, used car pricing across the country is highly transparent. You can check the pricing on any make and model of car on sale from Edinburgh to Eastbourne to Enniskillen right from your phone in a matter of seconds, so there’s no need to ever pay over market value for a car – it’s just that market values are currently very high.

Shop around: Check used car prices from The Car Expert’s commercial partners to make sure you’re getting a good deal

A bumper year ahead for used car retailers

As the swing towards second-hand cars looks set to continue, used vehicle specialists are gearing up for a bumper year ahead. Experts at online used car retailer Cazoo said used car sales increased by 17% between January 2021 and January 2022. The average price of a used car leapt by 44% to just under £17,000 as consumers surged to replace their cars, according to Cazoo Data Services.

“Part of the improved demand is due to the lack of new car supply, but with used car sales volumes for 2021 at an unexpected 7.5 million units, there have clearly been other factors at play that have helped boost sales,” says Rupert Pontin, Head of Data Communications at Cazoo.

“The pandemic has been a large motivator to increased used car demand. Many people have been unable to take holidays in the way they had done before the pandemic and chose to spend the surplus cash on a replacement car.

Equally there has been a significant boost in the number of older cars being bought as second or third vehicles that have been used as commuter vehicles with consumers seeking to avoid travelling on public transport.

“With new car supply still being hurt by a lack of semiconductors for some car makers and used car supply directly affected as a result, the pressure on used car prices looks set to continue for the foreseeable future.”

The flipside – your current car is worth more now

If you’re considering selling your current car, the good news is that you’re likely to get more money for it today than you would have a year ago. This sort of situation is very rare, so there’s no reason you shouldn’t take advantage of it if the circumstances are right.

As we mention above, dealers are paying more for cars now, so if you don’t need your car (or maybe a second car), now is a good time to sell it.

How do I avoid paying too much for a used car in 2022?

The simple reality is that used car pricing is significantly higher right now than it was a year ago, and it’s not going to return to normal anytime soon – in fact, probably not this year. That may mean you need to revise your expectations of what sort of car you can afford.

With pricing so high right now, it’s important not to overspend. Used car prices will start falling again over the next year, so paying more money now just means you’ll have lost more in three or four years’ time when you next change your car.

However, the same principles of buying a used car apply now just as much as they always have. Plan ahead, so you’re not forced into buying a car that’s outside your budget. Shop around for both car prices and finance rates. Get insurance quotes before you choose a car, not after you’ve bought it.

The good news is that your current car will be worth more as a part-exchange, so make sure you get quotes from online car buyers like our partners below rather than just accepting a dealer’s valuation at face value.

As we’ve always advised, paying full price for the right car is better than getting a ‘great deal’ on the wrong car. Take your time, work out what you really need and then what you’d ideally like to have, then see what’s available within your budget.

Selling your car: Get quotes from online car buyers to make sure you’re getting the best price for your car
Used car finance: The best websites for used car finance

Tom Johnston
Tom Johnstonhttp://johnstonmedia.com/
Tom Johnston was the first-ever reporter on national motoring magazine Auto Express. He went on to become that magazine’s News Editor and Assistant Editor, and has also been Motoring Correspondent for the Daily Star and contributor to the Daily and Sunday Express. Today, as a freelance writer, content creator and copy editor, Tom works with exciting and interesting websites and magazines on varied projects.
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