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Shortages come to the rescue of market prices

Following a three-month period of price instability, auction sales results showed that price falls had all but been arrested in July. The recorded sales for 80,000 cars of all types and all ages revealed a month-on-month fall of 2%.

Thankfully it was better news for the dealer part-exchange sector – classified as cars aged older than 4.5 years – where prices increased 1%.

In the first half of August, prices have been broadly stable. This turnaround in events would usually be accompanied by a pick-up in trade demand, in response to a gain in retail activity. However, this time, stable prices are purely a function of reducing supply.

The supply of used cars is dictated by volumes of new and used cars transacted by dealers in the preceding weeks, and the part-exchanges and de-fleets that this business generates. In a near saturated market every new or used car purchase will produce a used car that enters the market.

However, because of depressed sales of new and used cars, the market has not had this injection of supply – explaining why there has been a steady reduction in wholesale supply over recent weeks. It’s now got to the point that the auctions are holding less inventory than this time last year.

Given the new car sales trend of recent months, it would not be surprising to see year-on-year retail sales down by around 10% from last September.

This being the case, shortages will be perpetuated throughout September because franchised dealers will be forced to go into the wholesale market to fill those forecourt gaps that would otherwise have been occupied by part-exchanges.

This argument only falls down if retail demand is more challenging than most people predict, in which case, many dealers will still be holding too much stock at month end.

The probable outcome is, that used retail business will be as challenging as most people suggest. Meaning stock will be short, but prices will remain steady. The prospects for October are very uncertain and too early to call.

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