Why it might be wise to hold off on buying a car for a little while longer

21st June, 2021

Why it might be wise to hold off on buying a car for a little while longer

The supply chain disruptions triggered by COVID-19 have caused the prices of many everyday items to surge, including new and used cars.

Used cars, which are normally a depreciating asset where the older they are, the cheaper they get, are currently appreciating in value.

I know this as I had two valuations done on my car — one in December and then again this week.

Despite being six months older and having a couple more thousand kilometres on the odometer, the value of my car increased by 13 per cent.

There are many reasons for the recent surge in automobile prices. Demand for both new and used cars has increased due to buyers wanting to take advantage of the low interest rates and government electric vehicle incentives.

Also, with the economy reopening and the Canadian savings rates being at an all-time high, many decided to buy cars as they had the money and were feeling considerably more financially secure compared to a year ago.

Chips and semi-conductors

Then there are supply chain issues. Cars are essentially computers on wheels that need chips and semi-conductors — of which there is a global shortage and orders are backlogged. There are thousands of cars that are 95 per cent complete but cannot be sold until the manufacturer sources one or two final parts. Until that happens, the cars remain off the market.

Jerome Powell, the chairman of the U.S. Federal Reserve, believes the high used car prices are temporary and should follow a similar path as lumber. After almost tripling in price from a year ago, the price of lumber peaked in May and has since fallen by 43 per cent.

If Powell’s predictions are correct, the bottleneck for cars should ease as more chips and semi-conductors hit the market.

The present chip shortage was made worse by the temporary closure of two large manufacturers — one due to a fire and the other due to a severe cold snap in Texas.

All the manufacturers are currently operating at full capacity and working overtime to take advantage of the high prices.

If car values follow a similar trend as lumber prices, then we should expect car prices, both new and used, to be elevated for at least a couple more months before gradually trending lower.

Better to be a seller right now

If I could avoid it, I wouldn’t buy a car in this environment — I’d much rather be a seller as they are the ones benefiting from the current car shortage.

The ideal time to have bought was a year ago when there was surplus of cars as Hertz and other rental companies dumped their inventory. At that time, cars were highly discounted but nobody was buying them.

Eventually supply will come back. Once the tens of thousands of near-complete cars receive their chips, they will hit the market and need to be sold. When that happens, dealerships will be more willing to negotiate, buyers will regain the upper hand and the prices of both used and new cars will drop.

Originally published in CBC’s Opinion section.

Thanks for reading Mark Ting @MarkTingCFP
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