'It's a simple enough law. Supply and demand. If supply equals demand, prices remain static. If demand exceeds supply, prices rise. And vice-versa.
This applies in all true markets. The used car market is no different and naturally, the law of supply and demand applies here. We're seeing the results of the law at the moment. Since the start of the year good quality, three-year-old stock has been in short supply.
No surprise there given the relatively smaller volumes of new cars being registered three years ago. Just 2.2 million cars were registered in 2000, a meagre 24,000 increase over the previous year which itself, was the lowest number since 1997.
So, as supply was relatively limited, prices rose. But it wasn't only a lack of supply that drove prices up, it was an increase in demand as well. In the first quarter of this year, used car sales climbed by 13.5% over the same period last year to 1,961,340 units. As the Society of Motor Manufacturers and Traders, from whom these figures came, commented: 'The used vehicle market is at its strongest ever. More used cars have been sold in the first quarter of 2003 than in any other quarter since records began.'
'Strongest ever.' Strong words indeed but we've also seen it in the increased demand for consumer finance. The Finance Leasing Association recently reported an increase of 4% in the first four months of this year in consumer demand for finance on used cars. And that was despite a drop of some 6% in April.
The surge in used car demand seems to have caught all the pundits by surprise. I cannot recall seeing any suggestion from any of the major forecasters telling me or anyone else that there would be increased demand this year.
But it should have been obvious. Low new car registrations three years ago equals low supply of three-year-old cars this year. It's hardly rocket science.
The only potential fly in this particular ointment was, of course, that demand had to at least remain steady.
Demand, by and large, is dictated by economic conditions and given how well the economy is performing – and has been since the mid-nineties despite a couple of wobbles – then it's small wonder that the market is forging ahead. There is, however, an anomaly in the figures that I'm sure you will have spotted by now.
If registrations were low three years ago, how come used car sales are at their highest ever now?
It is only an apparent anomaly for, of course, used car sales are comprised not only of three-year-old cars but also of sub-one-year, one-year-old and two-year-old vehicles.
And in 2001 and 2002 we saw two all-time record years for new car registrations. Some of these later registrations are in the used car market already, especially those from manufacturers' demonstrator and management car programmes as well as ex-rental vehicles. In all, it adds up to a pretty good mix. Strong demand, weak supply. But will it last?
Unlike some, I'm not in the forecasting business but it seems to me the high levels of registrations in 2001 and 2002 plus the purported 2.45 million car registrations for this year will at best put us into an over-supply situation for the three-year-old car except for one potential saving factor.
Prices of three-year-old cars have been, and will be, at such a level that combined with the continuing low cost of finance, the person who previously bought a five or six-year-old car on the used market because that is what he or she could afford, will be in a position to buy a three-year-old car for much the same money.
And that can only be good news for the used cars that the fleet industry will be disposing of in the coming years.'