In recent years, the global car market has become synonymous with disruption. Supply chain issues caused by the pandemic and an unsettled geopolitical landscape, including the rationing of semiconductors essential to car production, have restricted the availability of newly manufactured cars.

As a result, cars sold on dealership forecourts and used car websites have not been able to satisfy spiralling consumer demand. This dynamic accelerated during the pandemic and the immediate post-pandemic period by increased personal liquidity.

Predictably, these forces of heightened demand and gradually slowing supply has caused global price hikes in new and used cars - a problem exacerbated by soaring global inflation. Since 2015, the average price of a new car across France, the UK, Germany, Italy, and Spain has risen from US$36,037 to US$44,769. Similar price rises were evident in America. Data cited by Bloomberg shows from 2019, the average price of a new car increased by 30 percent to $50,000.

Despite these considerable rises, likely microchip shortages mean the prices of new cars will rise well into 2023. As a result, consumers have come to expect delays of one and a half or even two years to get behind the wheel of a new car. This reality has transformed the global car market.

Historically, when consumers drove new cars out of dealerships, 10-20 percent of the car’s value was lost immediately. Now, the same car can be sold above its forecourt price, as consumers have been leaping at the chance to pay premiums to acquire the likes of a new Mercedes, so long as the quid pro quo is avoiding an 18 month purchasing lead time.

This overvaluation has had a direct effect on the used car market. When combined with increased demand, buying a used car has become more expensive and competitive than ever. From December 2019 to October 2022, the US Bureau of Labor Statistics showed that used car prices have risen by 42 percent. While amid general market cooling average used car prices fell to $29,000 in January 2023 (-7.6 percent year-on-year), the underlying trend is not broken.

Factor in the growth of online platforms selling and advertising used cars, and the increase in tech-enabled purchases globally, and there is an inevitability to rocketing demand and prices. As with most rapid inflationary trends and the adjustment mechanism of markets, elevated prices are unsustainable. A correction is due, the question is merely when.

We are already seeing this dynamic unfold. Easing supply chain pressures are helping to rebalance supply. At the same time, the unjustified froth in equity market prices is disappearing with prices plummeting - leaving some investors/consumers with less cash to burn. Other pressure on disposable income is a post-pandemic effect. Consumers' disposable incomes increased in 2020 and 2021 as the pandemic caused debt forbearance, stimulus checks, and better unemployment benefits. A lot of buyers are now defaulting on auto loans from 2020 and 2021.

According to Barron’s, the United States has been experiencing a surge in repossessed vehicles. Auto dealers are reporting repossessed vehicles going to auction and the buyer's loan-to-value ("LTV") ratio being over 130 percent. That is a conservative estimate - Barron's cited one dealer quoting ratios at 140 percent.

LTV is the loan amount versus the value of the actual vehicle. Put simply, buyers are defaulting on car loans of $26,000... on vehicles worth only $20,000 - an LTV of 130 percent.

In its Q3 2022 earnings call, financial services company – Wells Fargo – also reported a higher loss ratio from auto loans.

If this correction happens as anticipated, a new Land Rover bought today at a considerable premium will hold only a fraction of its value in five years, as it will have depreciated in line with its sticker value in a normalised price environment – and not retain the exaggerated price at which it was bought.

While the correction will mean many will lose out, it should not be lamented. The global car market we have witnessed between the start of 2020 and today has neither been healthy nor sustainable. We’re moving from a situation of no supply to a flood of inventory. That means the high prices are coming to an end.

Parallel to equity markets – a correction in the global car market is overdue. We must hope it will happen sooner rather than later, injecting sanity into the market and preventing a truly devastating future collapse.