New cars are officially unaffordable. Car prices increased considerably more than income resulting in a new all time high in the vehicle affordability index. People are sick of it as the intention to purchase a new car plummeted. Moreover, low income groups are pushed out of the market. At the same time, we might be close to a tipping point as the worst supply chain constraints appear to be behind use.
Vehicle prices are up by 30% since the start of the pandemic. This increase is significant more than the increase in the median household income. Hence, cars are more unaffordable than ever. A consequence of this is that the lowest income group is pushed out of the market.
Prices were pushed up by two factors; supply chain constraints and a change in product mixed. Among others, supply chain mismanagement resulted in a chip shortage for automotive manufacturers. This, in turn, caused supply to drop below demand. However, that’s not all. OEM’s also shifted there product mix. Compared to a few years ago, manufacturers are focusing more on the high of the market. Car prices are higher in that segment and so are the margins.
Opinions differ as to when we will see a drop in new vehicle prices. On the supply side the expectation is that chip shortages should be resolved by the end of 2023. Yet, other materials such as electrical steel might be the next bottleneck. Also, even when supply increases, it can be questioned whether the car manufacturers will produce more cars. Some already commented that they will continue to create an artificial scarcity. On the demand we can see that the intention to purchase a new car decreased. Prices might be too inflated as the lowest income group is pushed out of the market.
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