Covid impact: With demand exceeding supply, used car prices zoom

The increased preference for personal mobility due to safety concerns amid the Covid-19 pandemic has led to supply constraints in the used car market, as people are holding on to their cars longer.

Meanwhile, demand for used cars has increased rapidly compared to pre-Covid times, and this mismatch between demand and supply has led to a 2-7 per cent increase in the price of used cars, said experts.

Supply crunch

“The demand for used cars has certainly increased from pre-pandemic times. The used vehicle market is facing supply constraints due to three factors: customers are holding on to their used vehicles and not selling them as they were doing before the pandemic, exchanges have been impacted due to continued challenges in the new car market, and repossessions have virtually stopped since April due to the ongoing loan moratorium. Due to supply constraints and unpredictable nature of the lockdown, sales were impacted during the first few months,” Ashutosh Pandey, MD and CEO, Mahindra First Choice Wheels, told BusinessLine.

While the pandemic has led to an increased requirement of personal mobility, this has been met with lower expected income amid the economic distress, said Shashank Srivastava, Executive Director (Marketing and Sales), Maruti Suzuki India. This has led to a downward telescoping of demand amid the pandemic, resulting in greater demand for used cars, whilst also leading people to not sell their old cars in the market, which is the source of supply in the pre-owned car market, he explained.

“The used car market is a sunrise industry and whenever there is an economic downturn people tend to gravitate towards used cars,” said Amit Kumar, Head, Olx Autos India.

This mismatch between demand and supply has led to a 6-7 per cent increase in the buying price of used cars, while the selling price has increased by a bit more, said Srivastava.

Pandey pegged the price increase for select popular models at 2-3 per cent. “However, this isn’t an all-India trend as yet. Should the supply-demand mismatch continue, we can expect prices to firm up in the coming months,” he said.

“The critical difference between used cars and new cars is that there is lesser control on the supply side of used cars. In new cars, you will produce more vehicles when the demand goes up, but in used cars, when the demand goes up, you can’t produce used cars. Somebody has to sell his car for some other person to buy,” explained Srivastava.

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Vehicles’ repossession

At Maruti, replacement car-buying itself has come down by around eight per cent, which is a reflection that people are reluctant to sell their old cars for exchange, he said.

“Loan moratorium has provided an option for consumers to defer their EMIs, which has delayed repossession of vehicles and has also impacted supply in the market,” said Ashish Modani, Vice-President, ICRA Ltd.

The recovery on demand (at 133%) has been faster than supply (at 112%) at Olx, said Kumar. Hence, the supply of used cars is rising rapidly in order to cater to this demand, he added.

However, Pandey said that the used vehicle market has come back to near normal levels since August, adding that he expects the supply situation to get to near normal in the coming months as repossessions start after the moratorium and new car sales pick up.

After the supply constraints in the early months of this year, with increased remote work, people returning to home-towns and moving closer to families, people are looking at buying bigger vehicles or cars in the new city, said Niraj Singh, Founder & CEO, Spinny, a used car platform.

During FY21, the used car market is likely to be in the 3.5-3.7 million range and this will be lower than 4.2 million used cars sold during FY20, said Pandey. “However, after factoring in the impact of lockdown during April-June, the used car market during the rest of FY21 (July-March) is likely to grow by 5-7 per cent,” he added.

Positive outlook

“Used cars will continue to see a faster recovery in demand and much will depend on the supply catching up to the same,” said Olx’s Kumar.

The used car market is expected to witness a comparatively lower decline than the new car market, said Hetal Gandhi, Director, Crisil Research.

After facing back-to-back setbacks because of demonetisation and GST, the used car market has witnessed healthy demand momentum and has outperformed new car sales in the last two years, said Modani. “We expect the organised used car market to outperform new-vehicle sales in the medium term (next 3-5 years),” he added.

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