The effects of covid-19 on the automotive market have rendered many Australians frustrated by protracted wait times on new orders, but the implications do not end there. In addition to an aversion for public transport and inflated household savings, shortages for new cars have framed the perfect storm for an unprecedented boom in the used car market.
Used Cars Command Record Price Tags
Data released by Moody’s Analytics points to the prices of second-hand cars soaring an average of 34.3% year-on-year in June before moderating to 27.4% in July, far exceeding the pre-pandemic high set in February of 2020. Before you cast your mind to classic cars and high-end collector vehicles, ordinary high-volume vehicles in Australia such as Toyota Landcruiser’s and Ford Ranger’s are selling for as much as an astonishing 60% higher than they were 12 months ago. To put the magnitude of this rise into perspective, used car prices only rose a tick over 20% between the trough of the Global Financial Crisis in 2008 to the pre-pandemic high in 2020.
This phenomenon has also pervaded the US, where recent inflationary data has drawn the attention of economists and investors alike. In June, inflation data published highlighted a 45.2% year-on-year increase in the price of used car and trucks, which in isolation accounted for a startling one third of the Annual Headline Inflation figure of 5.4% in June, the highest observed since August 2008.
What is Fuelling the Boom?
On the supply-side, a global shortage of semiconductors is at the centre of OEM Manufacturers’ inability to keep up with demand for new cars, which has turned many frustrated Australians to the used-car market.
Persistent lockdowns in South-East Asia, a prominent player in the supply of passive components for semiconductors such as resistors and capacitors necessary for features such as electronic safety systems and infotainment systems, have prevented such companies from operating at full capacity at a time where demand has soared. Despite receiving exemptions from lockdown orders imposed in Malaysia, many of Malaysia’s largest semiconductor-related companies have had their operations capped at 60% of capacity, with shipping delays only perpetuating the problem.
Perhaps the ramifications are most evident in recent events at Mercedes Benz. For the first time in history, a shortage of semiconductor chips meant Mercedes Benz was forced to halt its primary production lines in Germany, despite withstanding both the first and second world wars. For Australians, wait times for family cars such as Kia Sorrento’s and Toyota Rav4 Hybrid’s, both high volume vehicles that in normal times are aplenty, have been extended to in excess of eight months in some cases. It is no surprise then that patience has worn thin for many Australians eager to get their hands on a car, resulting in more Australians than ever considering the used car market.
Perhaps the final piece in what many industry experts have denoted the ‘perfect storm of events’, is a level of demand for used cars previously unforeseen. For many Australians, the desire to purchase an additional car or upgrade their existing vehicle has been driven by a growing aversion towards public transport, while for others it’s a matter seeking to explore the best of what Australia has to offer while international travel remains prohibited. Such demand has only been amplified by inflated household savings in the wake of unprecedented fiscal support.
Winners and Losers
While many Australians thinking of upgrading their vehicles or purchasing a second family vehicle have been left anxiously waiting for prices to normalise, owners of vehicles such as Toyota Landcruiser’s have been licking their lips. As Australians have sought to pack their bags and use the opportunity of closed international borders to explore their own backyard, certain four-wheel drives have fetched prices more akin to their brand-new counterparts.
Arguably, however, shareholders of ASX-listed giants such as Eagers Automotive and Carsales may just be the greatest beneficiaries of the used-car boom. On the back of these ideal conditions, inflated turnover and margins has seen those that were astute or fortunate enough to hold the shares of these two beneficiaries rewarded with exceptional shareholder returns, with Carsales’ shareholders a whopping 35% better off than they were prior to the onset of covid-19. In their first-half result published on Thursday, Eagers Automotive’s management pointed to the continued strength in the used car market as a major driver of the contribution by its easyauto123 arm, while Carsales has been buoyed by used car prices which have compensated for the relative weakness in the new car market.
Boom and Bust
In the midst of such unusual circumstances, the question on everyone’s mind is: When will prices come crashing back to reality?
In a report published in July 2020 by Moody’s Analytics, while acknowledging the unpredictability of new and used car prices given the uncertain wider economic climate, the firm was of the belief that prices had peaked and were soon to gradually normalise. Since then prices have soared a further 30-odd percent, evidently exceeding all expectations of a swift normalisation and illustrating the precariousness of attempting to time such an unpredictable market.
Despite prices have remained elevated far beyond what the industry initially expected, the consensus view is now that prices for used cars will begin to normalise albeit gradually. Craig Moore of Craig Moore Wholesale Cars in western Sydney highlights that “as the world returns to normal, the prices of used cars will eventually settle again to where they should be.” The Australian Automotive Dealers Association echoes Moore’s sentiments, contending that “the carmakers are working to increase the supply of vehicles, which then flows through the entire market to eventually alleviate some of those price pressures”.
As lockdowns across the east coast of the country persist and consumer confidence remains subdued while supply chains simultaneously begin to recover, it is difficult to see another leg up in the used car market. Accordingly, if you’ve been hanging to get your hands on a used car it may be best to hang on for another six months.
It may all soon be over, and while it has been painful for some, it has been a hell of a ride for others astute enough to cash out at the right time.
Peter Cotsopoulos is a Research Analyst at UNIT (University of Melbourne), whose work primarily focuses on the macroeconomic forces influencing financial markets.
Financial Times: https://www.ft.com/content/70491b2f-6b6c-4489-ae14-706ed835c423