Second-hand car market – law of unintended consequences

Sunday, September 13, 2009

Drive a new car off the forecourt and you it immediately loses a sizeable slice of its value. And, under normal market conditions, second-hand cars lose value by about 15 per cent a year, but this year they are increasing in value – by an average of £600 so far this year – mainly due to a shortage of supply caused by the government’s scrappage scheme.

The government intervention has led to unintended consequences, as so often happens. The popularity of the government scrappage scheme, under which people get a £2,000 discount for scrapping a 10-year-old vehicle, (intended to kick-start the floundering car industry) has meant that the supply of second-hand cars has ended up falling, causing prices to rise.

So whilst the scheme is helping the new car manufacturers, it has not been such good news for second-hand car customers looking to pick up bargains.

The price of a 2006 Land Rover Discovery 2.7 with 30,000 miles on the clock has gone up by about £3,400 since January to £20,000, while a four-door VW Passat 2.0 has gone up by about £1,300 and a Ford Focus 1.6 Zetec has risen by £925.

Another factor that has prevented prices from falling in the second-hand market is the current macroeconomic climate - Usually, large companies will replace their fleets of cars with newer ones, which causes an increase in the supply of second hand cars onto the market. But given the current economic climate, these new purchases have been postponed, which has translated ultimately into a shortage in the second hand car market.

Whilst the £300m scrappage scheme is intended to run until March 2010, the money is likely to be exhausted well before then, as over half of the money has already been spent. Germany’s £4.4 bn scrappage scheme ran out of money earlier this month.

Whilst the overall scheme has been successful in providing the struggling car industry with some hope, when the scheme ends, there will clearly be concerns that car sales will fall sharply without the government funded incentives. As with all government intervention of this type, it is not meant to be long-term but as a way of weathering the temporary storm – the question is whether the storm will have passed by March 2010.