Why the used car bubble is set to burst

hat have dogs, cats and second hand cars got in common? They’ve all seen prices go through the roof.

But while waiting lists and price tags for family pets are coming off the boil now the kids and grown ups are working less from home, demand and costs of used cars is still rocketing.

If you’d bought a second hand Mercedes S Class in January on the BuyaCar website, you’d have paid an average of £14,988. Today, it’s £17,371.

Car dealerships have rarely been busier, with Lookers, Vertu, Inchcape and today Pendragon all declaring soaring sales and profits from their second-hand departments.

Pent-up demand since lockdowns ended is one factor, particularly as Covid-cautious folks are now driving to work rather than hopping on crowded trains and buses.

But it’s more complicated than that.

The most recent industry data shows that, while used car sales in March were up 32% on the year, they’re still down 8% on pre-covid 2019.

So why the record prices?

It’s largely down to the lack of supply of new cars, which have been hit by shortages of semiconductors and other pandemic disruption to supply lines.

If you can’t get a new S Class but need to replace your old one, you’ll pay top dollar for a decent second hand version.

This has been terrific for the used car traders. Good enough easily to offset the shortfall in sales of new.

Cue upgrades in profit forecasts all round.

But it can’t last. Even the biggest dealers are now running out of their inventory of used cars bought before prices began to spike.

That means they’ll soon have to replenish their stock at the newly inflated prices, hitting their profit margins when they come to sell.

They’ll be hoping new car production lines will begin rolling again soon to reboot that side of their business, but its far from certain.

Most of the big players cut jobs and closed forecourts last year under cover of Covid and are far more efficient than they were.

That sets them up for a decent future if they can fend off the big-spending online rivals.

But, having seen their shares surge 40% and more this year after a dismal 2020, it feels like investors will now start applying the brakes.

It may be too soon to sell the shares, but don’t buy into the bubble.