Retailers and manufacturers are bracing for a residual values meltdown caused by new car oversupply as sales continue to surge. Experts believe residuals in the UK - already the worst in Europe - could drop by up to 10 per cent over the next three years due to surplus cars and the knock-on effect of falling new car prices from Block Exemption reform. This will significantly squeeze used car margins.

Retailers typically make between £700-£1000 on a used car - figures published by Sewells Information and Research show some earn up to 70 per cent more on a used car sale than a new one. But with sustained low interest rates persuading many buyers to switch to new cars, used car prices are set to slump, hitting profits.

At particular risk are smaller retailers who do not have the backing of manufacturers' approved used car programmes and those involved in fleet and finance buyback agreements. Independent retailers will have to rely on spotting market trends and adjusting their used car buying policies accordingly.

“The used car market will become more difficult to make money from - dealers will have to change their approach,” says one analyst. “But in most cases it is the carmakers who are driving forward this change.”

But Dixon Motors chairman Paul Dixon believes dealers who seize the initiative will continue to make money from the sector. “Even though residuals are getting weaker, there is still a profit opportunity on well-chosen cars that are two-to-three years old,” he says.