Firstly, no, it's not your imagination: cars really are that ridiculously expensive now compared to a few years ago. Both new and used car prices have shot up and, although they may mostly have peaked, prices are not coming down anywhere near as quickly as they rose.
Perfect storm
The reasons for the anti-gravity prices are manifold. Some are consequences of others, cascading like toppled dominoes, while others are unrelated but inconvenient coincidences. The main issues have arisen from the Covid pandemic, a global semiconductor shortage and general inflation. When you add them all together they make those price rises pretty inevitable.
Lockdown
The impact of Covid was profound. During the actual lockdown period, we mostly couldn't use our cars, even if we wanted to. Sales of cars slowed as people weren't driving and those who may have fancied a new car couldn't visit a showroom anyway. In many cases, factories were forced to shut down so production was interrupted.
When lockdown was relaxed, the demand shot up as one might expect. Not only were people released to go shopping for new cars, social distancing and anxiety over getting too close to people in confined spaces made public transport pretty unpopular. People who might usually take a bus or a train went back to their cars instead.
When production resumed, it was unable to keep up with the renewed demand.
Chips with everything
So, now we encounter the next domino in line: semiconductor chips.
Modern cars contain a lot of microchips. When we say a lot, we don't mean dozens, scores or even hundreds: the average new car contains over 1000 semiconductor chips. Electronics controls so many things that we take for granted that the number seems impossibly high but it is true. It is no wonder there are so few DIY fixes left for the amateur mechanic to tackle. There are increasingly few faults that can be reliably identified without access to expensive diagnostic equipment. That's partly because, ironically, many of the faults that illuminate our dashboard lights are caused by failures in the sensors and electronic circuits that are supposed to make our lives easier.
Not only did demand for chips drop dramatically, prompting manufacturers to compensate by retooling for other products, but some of those chip manufacturers were themselves put out of action by Covid, as were some mining and logistics companies. The whole supply chain almost ground to a halt.
But Covid wasn't the only contributor to the shortage. In fact, the overall picture was something of a perfect storm as pretty much everything that could go wrong did go wrong.
- In 2019, a fire in Ukraine interrupted the supply of material used in packaging semiconductors.
- An important manufacturing facility in Japan caught fire in March 2021, interrupting chip production there for 3 months. Most of the affected products were for the automotive industry.
- In March 2021 a cargo ship got stranded in the Suez Canal, blocking that vital waterway for over a week, thus delaying delivery of microchips.
- In February 2022, an ice storm in Texas and a consequent accompanying power failure put NXP, Samsung and Infineon fabs facilities there out of action.
- In 2022, it was reported that the conflict between Russia and Ukraine had stopped about half of the world's supply of semiconductor-grade neon. Neon is a vital ingredient in production.
Those are just the things that made the headlines.
The used alternative
According to the economic laws of supply and demand, as new cars got scarcer, their prices rose sharply. Our domino metaphor remains apt, as the shortage of new cars and their high prices made people turn to used cars instead. You can probably guess what happened next. Sure enough, the sudden increase in demand for used cars forced their prices up as well.
Even the most prescient economists were taken aback at the various chains of cause and effect that conspired to cause such chaos.
Pump it up
To round it all off, general inflation in the UK is running at a higher rate than it has for many years. Pretty much everything is costing more: wages, fuel, components, raw materials... Of course, the industry's increased cost burdens are passed onto the customer.
Wildcards
At the time of writing, car prices seem to have peaked and, perhaps, begun to come down again. The market has been growing again for some months so the demand seems to be there if production can keep up.
It remains to be seen quite how fully and sustainably the semiconductor supply has been restored. What is also far from clear is how car prices will be affected by other issues currently playing out.
Electric car technology - battery technology especially - is constantly evolving. While it is expected that the long awaited solid state batteries for electric vehicles will be cheaper to produce, we can't be sure how much of that saving will be passed on to factor into new car prices. In addition to the corporate desire to hold onto as much profit as possible, we must also expect a period during which prices are kept high by the need to recoup research and development costs.
Another area of uncertainty is government's stance on phasing out new petroleum-fuelled vehicles. At the moment the ban on new petrol and diesel cars looks set to be postponed. When it finally does happen, that is also likely to affect prices. New petrol cars will not, themselves, be a factor but their absence certainly will.
Where will car-buying traffic head? Will people flock to buy used cars or will they go electric? What will increased demand for used and electric vehicles mean for their prices? Will the government offer subsidies and incentives to make electric vehicles more affordable?
Who knows? If there's one thing we have learned from the colossal muddle described above, it is to always expect the unexpected.
