Why are used car prices going up? And how to find a bargain

Tristan Young

27 Sep 2021

Excluding a few rare exotics, used car values go down not up. Currently, that’s not happening. Prices of even the most mundane cars are rising. We talk to the experts to find out why this is, and if it’s possible to still find a deal.

In order to work out why used car prices are going up, not down, we need to take a step back and look at the new car market because all used cars start off as new cars.

Simply put, due to the global pandemic, factories around the world have not been running as normal. A combination of staff shortages, lockdowns and parts shortages (mostly microchips) mean that cars have been built in significantly smaller volumes than normal. As the primary method for used cars entering the market being when a new car is bought – via a part exchange – with fewer new cars sold, fewer used cars enter the market.

From new to used

This ripples through from those buying new to those buying a two or three-year old car on to those buying a four or five-year old car and so on.

Used car price expert, Mark Bulmer, senior valuations editor at Cap HPI, explained: “What we've seen is a really prolonged strengthening in the market, and the balance between supply and demand is obviously in favour of the seller. That is what's been pushing prices up. And the prices are as high as they are really because there are fewer part exchanges coming into the market from new cars, because as we know, the semiconductor issues that we've had this year remain with us, and we expect to be with us for some time to come.”

According to Bulmer, a good barometer for the situation is the number of trade sales –cars being bought by dealers to stock forecourts – which are running down 25% over normal levels.

“It's just the fact part exchanges the franchise dealers would normally be taking in are just not there. So the battle for that stock that is out there and availability is paramount to these businesses keeping going. Therefore, they have to give more money to be able to own the stock.”

Supply and demand

As fewer new cars are available, some of those people who would be looking for a new car but don’t want to wait a long (and often uncertain) amount of time for their next vehicle start to buy nearly-new cars. This further compounds the issue and has resulted in a typical three-year-old car with 60,000 miles rising more than 23% in the first eight months of 2021.

Bulmer believes that consumers are also looking at a broader list than they would normally because more people are working from home and their lifestyle has changed.

“The difference between the new price and the second-hand price has changed dramatically. I mean, in some instances there is no difference. The only difference being, is you can take the car now, or you can wait and pick it up in two or three, four months' time. However, people do seem to, when they decide to buy a vehicle, want it as soon as possible,” said Bulmer.

Historically, used car prices fluctuate both up and down but over a number of months follow a broadly downward trajectory.

The current upward trend has now been running for months and showing no sign of easing. What’s more, this is the first time such a value increase has been maintained.

Starting point

Rising prices started last year with sports cars and convertibles, according to Bulmer.

“Anything a little bit unusual and quite niche suddenly started to move in value. They’ve continued to rise into this year as well, whereas everything else is a little bit slower.

“The slowest to react were MPVs, funnily enough. They were probably least in favour in Covid. You don't want to get in a car with six other people. But sure enough, in the past two or three months, some of the values of those vehicles have shot up and caught everything else now. So there's no weak sector.

“And in terms of fuel type, I think possibly electric was the weakest, but that's because it was the highest priced vehicle [to start with]. So the other engine types, fuel types, have come up to close to where electric is, and now electric vehicles are starting to go up in price.”

The trend is also nationwide too, so you can’t grab a bargain by travelling further afield, according to Bulmer.

If travelling isn’t the answer, how do you get a good deal?

Best deals

“Everything's gone up relatively, hasn't it?,” pointed out Bulmer. “So, the part exchange you have will have definitely gone up.”

For those in a PCP agreements the value increase means your trade-in will be worth well above the minimum value, according to Bulmer. “So that step to the next car may or may not be as great as people think.”

Another way is to change the type of car you’re in.

It’s all relative, but if you’re lucky enough to be in car from a sector that’s risen faster than another then the cost to change will be narrower. For instance, if you want a EV and you’re selling a diesel, because diesel prices have risen faster than those for electric cars. Or if you’re in a sports car and want a luxury car – for the same reason.

Bulmer adds that because the retail market is a little behind the trade market this can work in buyers favour: “Therefore you do have a window of opportunity, but make sure you research correctly the car you want, and make sure that the part exchange that you're handing in is at its maximum value.”

Waiting for prices to fall isn’t an option, at least in the short term.

“If you'd have asked me probably six weeks ago, I would've thought by the end of the year into the first quarter of 2022, we'd start to see things turn around, as far as values easing up a bit.

“Now I think it could be longer. We don't see prices dropping in any significance in the short term,” concludes Bulmer.

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Tristan Young

27 Sep 2021