Used car prices are rising sharply as supply contracts. What’s the solution?

POA. Three little letters that mean so much. It stands for "price on application", and it's really a polite way of saying, in an advert, that if sir or madam has to inquire, then sir or madam really cannot afford. This one is for the well-heeled, the ones who don't have to bother checking their An Post account balance first. No riff-raff, in other words.

POA is most commonly used in adverts for very high-end cars – classic Ferraris, well-specced Porsches, Aston Martins with rock-star names on the log book, that sort of thing – but lately the dreaded trio of letters has been finding its way on to ads for cars far more humble than that. If you see POA appended to an advert for something rather more workaday, such as maybe a nice BMW 5 Series or an Audi Q7 – it means something different. It means “If we were to tell you the price up front, you’d just giggle and hang up on us.”

The thing is, the price of used cars in Ireland is no laughing matter if you're looking to buy. Values are spiking across the board, and many people are being priced out of the cars that, last year or the year before, they could have afforded.

“The Irish automotive marketplace is in a truly unique place right now, driven by several factors fuelled by the Covid-19 pandemic, Brexit and a global chip shortage curtailing new vehicle production,” says Conor O’Boyle, chief operating officer of Irish used car finder Sweep. “Given the circumstances, is it possible that in an industry where depreciation of vehicle value is as certain as death and taxes, are those same used vehicles somehow now appreciating in value? The answer is yes.”

The problem is a simple one of supply and demand. There are fewer good-quality used cars on the ground. But why is that? The answer is multilayered.

The first thing to look at is Brexit. The UK’s vote, in 2016, to leave the EU triggered a massive fall in the value of sterling, and that in turn triggered a massive rush to buy used cars in the UK and import them back to Ireland. With sterling and the euro almost equalised at one stage, it looked as if used UK imports might actually outnumber the sales of new Irish cars.

The flow was restricted, slightly, when the Irish Government introduced the NOx levy, which made it more expensive to import older diesel models, but the flow was really cut off by Brexit, which meant Irish buyers would now have to pay VAT at 23 per cent on any import from the UK, not just new cars, as had previously been the case. On top of the usual high costs of vehicle registration tax (VRT), there was also now customs duty to pay (unless you were bringing a car down from Northern Ireland, which also allows you to swerve the VAT charge). All of that added up to make used imports more expensive, and the result has been a 35 per cent reduction in used imports this year compared with 2019, when the market was in full swing.

Then came Covid

Next up? Covid, of course. The simple physical fact of lockdown put the kibosh on new car sales last year, at least for the early part of the year, and while things have certainly picked up again in 2021, there is nonetheless a notable lack of 201 and 202-reg cars on forecourts. That was exacerbated by the overnight collapse of the rental car sector – normally firms such as Hertz, Avis, Enterprise and so on regularly sell off their nearly new rentals, which adds a healthy stream of low-miles cars to used forecourts. Not in 2020, though.

What does all of that add up to? Rising new car values. With fewer cars on forecourts, and fewer new cars coming through the supply stream, good quality used cars are now officially scarce, and they’re being snapped up. “Where does this perfect storm of supply challenges and increasing demand leave the market?” asks Conor O’Boyle. “Well, how about a 6 per cent increase in the average cost of buying a used car versus last year. This is being experienced in vehicles ranging from one to eight years old.”

By way of example, O’Boyle shows a chart that demonstrates the depreciation curve of two Volkswagen Golfs. In July 2020, one notional Golf would have been worth an average €6,347 when it hit 10 years old. Now, in 2021, the same car would be worth €8,399.

It’s okay, though, surely? As new car sales are on the rise this year in Ireland, surely the supply-demand equation will even out over the next few months? Not necessarily.

The global car industry is currently in the grip of a shortage of microchips. There have been huge restrictions in microchip production of late, some of it caused by workers having to isolate with Covid, more of it because orders for chips were chopped when the first lockdowns began last spring, and it takes time to rebuild production – chips can't be just turned off and on again, at least not at a manufacturing level. Mike Long, chairman of Arrow, one of the key players in global chip and semi-conductor supply, and which has a significant operation in Ireland, says: "Last February the car makers were the ones calling everyone and saying they didn't want supply. Now they want to start back up, but there's no buffer inventory for them to start back up. When you get into just-in-time production, you're getting stuck because the lead times for making chips are extending. We're seeing more companies coming to us, to Arrow, and trying to work through that. For us it's going to be a long-term benefit because some companies are trying to build a little more flexibility into their structures."

No easy exit

Long cautioned that there’s no easy way out of the crisis, though: “The capacity additions at chip fabricators are currently limited, so there’s no supply surge coming. I don’t see any dramatic improvements in supply before the end of the year.”

Basically, the car makers got caught on the hop. Other big chip users, such as the companies that make mobile phones and laptops, kept their supplies and orders going, and so are less exposed to the shortages. The car makers thought they could just turn around and reorder when they needed to, but economics doesn’t work like that. Consultancy firm AlixPartners has estimated that the chip shortage could cost the world’s car makers $110 billion in lost sales.

Which means precisely what for the Irish used-car buyer? “What this means for Irish new-car buyers are lengthy delays or cancellations of their new car purchase – and in turn less trade-in volume being resold in the used-car market – another important supply line,” says O’Boyle.

While you might think that all of this is rather good news if you have a car to sell, or trade in, you might want to be a little cautious in that regard. Rather like the housing market, you could potentially make a killing on the sale, but then what are you going to buy as a replacement? Suddenly, you’ve gone from being the seller to being a buyer in a seller’s market.

So, what’s the end game for all of this? Eventually, the market will rebalance. Eventually the supply of second hand cars will open up again and prices will come back down to a more normal level. How long will that take? If anyone can accurately predict that, we’d like to hear their thoughts on this week’s Lotto numbers.