Used car market is not for the faint hearted

September saw car manufacturers cut back production in an effort to match falling demand. The ailing pound pushed UK new car prices even higher and whilst the US finance market shored up Freddie Mac and Fannie Mae and, subsequently, AIG, it was still hit by the demise of Lehman Brothers.

With that as a backdrop, and with most cars manufactured outside the UK, the falling pound should lead to a round or two of new car price increases in the coming weeks, particularly for those made in the US.

When it comes to the used car market, the situation is equally challenging. Used car valuations are down by more than 25 per cent year on year, according to the latest figures from the HPI Used Car Valuations Index. And used vehicle values have suffered further falls in both the car and light commercial markets.

Combine this with lower demand, high stocking costs and shrinking profit margins and you could have a recipe for insolvent dealerships.

But there is hope that things may be about to bottom out. Despite the across the board falls, some sectors are performing better than others and a few are beginning to show very small signs of a potential recovery.

Buyers continue to downsize, which is having a negative impact in the Luxury, Premium and 4x4 sectors. However it is buoying demand for many City cars and Superminis.

The petrol 12-month-old City car recovered slightly in September, with its year-on-year fall at 9 per cent. The diesel version performed even better, showing a total fall of 5.6 per cent. While neither are by no means great, they compare favourably against the average year-on-year fall for all 12 month vehicles of over 20 per cent and the 33 per cent drop suffered by the three-year-old luxury sector.

While doubts linger over the Government’s vehicle excise plans, the City car will continue to benefit as people look to reduce their CO2 emissions - and possibly their tax burden too.

However, one sector that may have fallen as far as it can is the 3 year old family car group. Both petrol and diesel family cars saw values rally a little in September, rising 2.3 and 1.9 per cent respectively, compared to year-on-year figures for August against September. The 12-month diesel MPV is also steadying – perhaps a sign that family practicality is fighting back over image?

But, there is no escaping the fact that on the whole, year-on-year, values continue to drop. And when we compare the variances of year-on-year figures for August against September, we see an average fall of around 3 per cent a month for all 12 month old vehicles and 2.4% for all 3 year old vehicles.

The much-maligned 12-month-old petrol luxury sector slipped the most, falling another 6.4 per cent, followed closely by 12-month diesel Small cars at 6.1 per cent.

Martin Keighley, HPI Valuations Expert, believes tough decisions are called for to ensure the early shoots of recovery take hold. “Overall things are bleak, but as we approach Christmas it is hoped values will level out as the rate of fall begins to slow.

“More and more of us are making the difficult decision to cut losses. The time for sitting tight and hoping for the best has passed. Of course, it’s a bitter pill to swallow, but the alternative is even worse.”