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Supply and Demand is Raising Price of Used Luxury Cars

Luxury car driving into sunset
Everybody knows that as soon as a buyer drives a new vehicle off a lot, that vehicle loses a substantial amount of value—all because that automobile is now “used.” It’s largely due to that reason that financial experts often say vehicles are one of the worse investments we can make.

But for those seeking a used car loan, the rapid depreciation that vehicles undergo in their first few years of existence is more than welcome. In fact, many used car buyers rely on that price drop.

That price drop, however, isn’t guaranteed. And for some cars, that price drop may start to become far less pronounced.

The Luxury Car Market and the Recession

While auto lenders—particularly those in the used car loan sector—have seemingly sprung back to their feet, auto manufacturers haven’t quite sealed all of their recession-afflicted wounds. Unsurprisingly, manufacturers who produced high-end and expensive luxury vehicles were amongst the most severely scarred.

A slew of luxury automobile manufacturers underwent a gauntlet that was unseen by any other type of automobile manufacturer. Hummer and Saab both declared bankruptcy. Jaguar, Land Rover, and Volvo experienced ownership changes. And Infiniti, Acura, and Lexus (Toyota) all have their headquarters stationed in Japan, which shouldered not only the economic crisis, but also several major natural disasters.

Needless to say, the luxury automobile industry was hit particularly hard in the last few years—a hit which rippled beyond the manufacturers and into a very surprising sector of the market: used car loan borrowers.

Supply is Falling… But Demand’s NotSupply and demand graph

Between 2009 and 2011, used prices for luxury cars grew by nearly 22 percent, according to a recent report by the National Auto Dealers Association (NADA).

Why?

Due to the enormous obstacles that luxury manufacturers faced during the recession, supply dropped enormously. According to NADA’s report, supply fell by 13 percent—even though demand remained.

And, as per arguably the most well-known economic theory out there, when supply drops but demand doesn’t, prices increase.

Those with used car loans who are looking to buy luxury vehicles should pay close attention to this trend because NADA doesn’t believe that the 22 percent price increase has hit the ceiling.

In fact, NADA predicts that luxury sector prices will continue to rise by 1.9 percent annually for the next few years given their prediction of another supply drop of 13 percent this year followed by a 5 percent drop in 2013.

That means any used car loan borrower interested in buying a luxury vehicle should do so sooner rather than later.

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