Here's why used car prices have exploded (and new cars are rare as hen's teeth)

The economy is like a human pyramid, and COVID-19 came along and kicked the foot out from under the poor acrobat at the bottom. The flow-on implications have been massive.

For one thing, the used-car market in Australia has gone utterly bonkers.

For example, my wife and I picked up a 2015 Volkswagen Polo GTI in 2019 for $21,830. We doubled the number of kilometres on the clock zipping between Queanbeyan and Canberra before selling it last year for $18,500.

It turns out that was a bargain. Others with 70,000 km have been going for $22,000 or more. This for a car that began life at $29,990.

According to data from Moody’s Analytics, a US-based economic forecasting company, wholesale used-car prices across Australia are 37 per cent higher than the pre-pandemic figures seen in February 2020.

In the first quarter of 2021 alone, prices increased by 5 per cent, the fastest quarterly increase seen in the last 10 years.

Mirko Milic is the Dealer Principal of Canberra Toyota and Lexus of Canberra. He says that there is definitely a “strong used car market out there”.

A bottleneck in the supply of new cars is to blame.

“What’s happening is a time gap,” he says.

“We’re still selling new cars, but we’re not delivering for a number of months. It’s not the traditional model where someone decides to buy a new car and they’re in it within a couple of weeks. Now, they could be waiting six months.”

Before COVID-19 struck, auto production around the world was facing a shortage of semiconductors. In the modern car, with its increasingly complex electrical and infotainment systems, these tiny chips are just as important as an engine and four wheels.

All of a sudden, international travel was banned, interest rates plummeted and governments began handing out money to their citizens in a bid to alleviate job cuts. Many saw it as prime time to smash open the piggy bank.

“Rather than going overseas, they’re upgrading their cars,” Mirko says.

“The property market is also very hot, so what typically happens is when someone buys a new house, they tend to buy a new car as well. That’s always been the case, but more so now.”

It had been a slow couple of years for car sales, but in early 2020, they went through the roof.

The worldwide rebound caught the semiconductor suppliers completely off-guard. To make matters worse, many of their factories – along with the factories of car manufacturers – had been forced to close due to lockdown orders.

At a time of massive demand, the supply simply wasn’t up to it. And even when the cars are finally ready to leave their country of origin, there’s another issue.

“Freight costs are going up and up, and trying to get a container is near impossible at the moment,” Mirko says.

Rather than endure the agonising wait between ordering and picking up, many are turning to the second-hand market for more instant gratification. Demand for used cars is now soaring, but even these are thin on the ground.

“If we’re not supplying new cars, then the trade-ins associated with them aren’t coming in either. And fleet companies with a high number of cars, such as car rentals, are hanging onto their cars now because they can’t find new replacements. We can’t buy those cars and sell them as used cars.”

Canberra Toyota has four dealerships across the capital region, with 70 pre-owned cars currently in stock. Normally, it’s double that.

So when will this mess be over?

“I think we’re in for some similarly difficult times for the rest of this year, but every manufacturer has ramped up their production plans so they can get all the accessories they need,” Mirko says.

“It will probably be the same until next year.”