It's going to be a good time to buy a used car, if you're able to

This week in my (online) ECONS101 class, we covered supply and demand. So, it was interesting to see this opinion piece by David Linklater in the New Zealand Herald on Thursday:

What will happen to the New Zealand car industry once the country gets back to some kind of normality (also known as level 2, level 1… no level)? More to the point, will it suddenly be a buyers' market big-time for those still in a position to purchase?

The truth is that nobody in the Kiwi industry knows at this stage.

That last sentence is only correct in the sense that no one knows exactly what will happen. However, the article itself pretty much tells us what will happen. Let's just consider the market for used cars. The article says:

A month of virtually no sales has corrected any supply issues for new and used; that and the dire situation rental car firms are in, with the potential need to offload thousands of unwanted near-new cars.

So in the very short term, it's fair to say this is very much a buyers' market. Dealerships have stock and they're very motivated to move it as quickly as possible. There will certainly be fewer buyers thanks to the economic impact of Covid-19, but those who are left will be tempted with a lot of choice and great incentives. The ships didn't stop coming just because New Zealand went into lockdown; the cars still came.

So, we can expect a decrease in the demand for used cars. With unemployment looking like being at record levels, consumers aren't looking to take on debt or blow their savings on updating their vehicle (even if some may prefer to drive rather than take public transport), so the demand for used cars is likely to decrease. On the other hand, rental car companies suddenly have lots of cars that no one is renting, so they'll likely be looking to offload some of that stock, meaning that the supply of used cars is likely to increase.

The combined effects of those two market changes (a decrease in demand and an increase in supply) is illustrated in the diagram below. The market starts at equilibrium, where demand is D0 and supply is S0. The equilibrium price is P0 and the equilibrium quantity of used cars traded is Q0. Demand decreases from D0 to D1, and supply increases from S0 to S1. The price of used cars decreases to P1. The change in the quantity of used cars traded is ambiguous though - it could increase, decrease, or (unlikely, although this is what the diagram shows) stay the same. What happens to quantity depends on the relative size of the shifts in demand and supply.

So, we can be fairly sure that the price of used cars is about to fall in New Zealand. If you're secure enough, it will soon be a good time to upgrade your car. As Linklater said, "this is very much a buyers' market".