‘This is the worst we’ve seen’: why sales of new cars are crumbling

The new car market is “crumbling” to all-time lows as drivers shun high costs and shift their attention to second-hand motors.

Demand from families and individuals dropped by more than 15pc in June, figures from the Society of Motor Manufacturers and Traders (SMMT) show.

The number of cars sold to private buyers stood at 67,625 last month, down from 79,798 the year prior.

This is in stark contrast to the buoyant used car market, which saw demand rise 6.5pc and reach a five-year high in the first three months of 2024.

Experts blamed the decline on the cost of new vehicles. The average new car commands a price north of £40,000, compared with the average price of around £16,500 for a used car, according to motor retailer Auto Trader.

The cost of a new motor has surged by 40pc in the space of five years, while the share of new models for sale below £20,000 has slumped from 17pc to just 4pc.

Stuart Masson, of the Car Expert, an adviser, said: “The number of normal drivers going into dealerships and buying new cars is crumbling.

“There’s no change for this in sight, even with the election out of the way. Sales will continue to slide unless the industry starts selling much cheaper cars.

“The market peaked in 2015 and it’s been falling ever since, this is the worst we’ve seen across all car types, whether it be petrol, diesel, hybrid or electric.”

Priced out by interest rates

There has been a marked shift from manufacturers to build bigger vehicles in recent years, but Umesh Samani, chairman of the Independent Motor Dealers Association, believes this has hurt sales.

New cars are growing wider by 1cm every two years, with the average vehicle now more than 180cm wide compared to 170cm in 2001.

Mr Samani said: “A lot of manufacturers don’t offer small cars anymore. There’s still a market for them as not everyone wants a big SUV but there are less and less of them being made, so people aren’t buying new cars.

“Instead, they are buying used small cars as they can get ones which are 12 to 18 months old at a good price. Not everyone wants a big car.”

The appetite for hatchbacks rather than SUVs is evident in the used car market. The Ford Fiesta, which went out of production last year, was by far and away the most-bought second hand car in the first three months of the year, with 81,000 being sold.

Others said motorists have been driven off the road by high interest rates. More than 90pc of new cars were bought on finance last year, according to motoring website Parkers, with drivers taking out a contract to cut the cost of the vehicle into monthly payments, plus interest, over a set period of time.

But due to the current interest rate climate and the ongoing discretionary commission investigation, the appetite for finance deals has dropped.

“Car finance payments have gone up and up and up and people are taking longer terms as it makes more financial sense,” Mr Masson said.

“The average contract used to be three years but now it’s four years. So people are keeping their cars for longer and not getting new ones.”

The most-bought new car in June was the Kia Sportage, with 4,113 being sold.

Models range in price from £29,390 to £45,775. A driver taking out a PCP deal with Kia Finance would currently pay 7.9pc in interest.

Carmakers had previously struggled to meet demand for new vehicles after the Covid pandemic disrupted supply chains, but the appetite for zero-mileage motors among drivers has shrunk significantly.

Lisa Watson, of finance provider Close Brothers, said consumer confidence is “stalling” and feared there could be “dips in demand in the months ahead”.

Her worries are echoed by Steve Gooding, director of the RAC Foundation: “It’s hard to see how the market is going to shift up a gear in the months ahead.”

Working from home

Mr Samani said the current work from home culture has dampened demand from would-be car buyers.

“Lots of people are still working from home and they have no desire to change their cars as they just sit on the driveway doing hardly any mileage,” he said.

For those who do require a car, scores of companies are offering vehicles to employees as a way of salary sacrifice.

“The company car market is much bigger now so less people are buying new cars themselves,” Mr Samani said.

“People are thinking ‘hold on a minute, there’s no point forking out for a new car as I can get one through my company’.”

SMMT figures show sales to fleets and businesses now account for 62pc of all new car purchases, far outweighing uptake from private buyers.

Buyers are also smarter. Those who do take the plunge and buy a new car are now more alert to the inevitability of instant value depreciation.

According to the AA, a new car loses around 40pc of its value in the first 12 months and 60pc by year three.

Ms Watson said: “You pay VAT when buying a new car so you’ve lost a 20pc chunk as soon as you leave the showroom. I think people are wary of it.

“We’ve also got a lot of manufacturers face-lifting cars now, so they are bringing out updated versions of the same car. This then causes the value of the old version to depreciate much more quickly.

“Using an extreme example from last year when Aston Martin brought out the DB12, it crucified the value of the DB11.

“If you’d bought the DB11 you’d be crying because you lost £100,000 from the value.”

£4,000 a year running costs

Three in five drivers say car ownership is becoming unaffordable, with rising fuel prices being the main concern according to research by Close Brothers.

Market research firm Nimblefins said combined costs for repairs, insurance, parking, tolls, fuel and other outlays mean motorists are shelling out £3,834 a year to run their car – a 19pc rise compared with 2020.

Petrol prices have risen by 10p a litre since the start of the year and currently stand at 150p. It means the average-sized fuel tank now costs around £75 to fill up, compared to £53.50 four years ago.

Sky-high insurance costs are also making would-be motorists think twice about buying new cars.

Newer vehicles typically command higher insurance premiums due to heftier repair costs and the increased likelihood of theft.

The Association of British Insurers (ABI) said advanced tech in new vehicles have pushed up the cost of repairs and the cost to replace written-off vehicles. It found that insurers paid out a record £9.9bn in motor claims last year, up 18pc on 2022.

Across the whole car market, insurance premiums have increased by an average of £132 in the past year, according to the latest Compare the Market figures. A typical premium now costs £850 while drivers aged under 24 face astronomical average costs of £1,901.

Tax breaks scrapped and net zero uncertainty

Much of the focus in the years to come will be on a shift to electric, yet tax breaks for new electric cars are due to be axed – potentially putting further strain on new car uptake.

Electric vehicle (EV) owners are currently exempt from the vehicle excise duty (VED), but they will be liable to pay the standard rate of £180 a year from next year.

New electric cars registered on or after April 1, 2025, will pay £10 in the first year, before then going onto the annual £180 rate.

The Treasury predicts the expansion of the tax regime will be worth an additional £515m in 2025-26, £985m in 2026-27 and almost £1.6bn in 2027-28.

April 2025 will also bring an end to the “expensive car supplement” exemption for new electric vehicles.

The tax, which costs £410 annually for five years after buying a car valued at £40,000 or more, will apply to around half of all electric vehicle models at current prices.

The general election has also had an impact on new car demand, with buyers apprehensive to part with cash ahead of potential policy changes.

“People are sitting, waiting, and thinking what the Government is going to do, and whether it will try to drive forward green policies,” Ms Watson said.

“I think people are nervous of investing a lot of their money into cars which potentially could cost them a lot more than anticipated later down the line.”

So far, Labour has pledged to bring forward the ban on new petrol and diesel cars to 2030 – five years before the 2035 set by the Conservatives, as part of a push for net zero.

Labour could also look to increase the number of low and zero-emission zones around Britain, and beef up fines for non-compliant vehicles.

Industry leaders have warned that the demand for EVs is not there, with fewer than one in five new electric cars being bought by private buyers in June.

Vauxhall owner Stellantis has said it could restrict sales of cars in the UK in response to the zero emissions vehicle (ZEV) mandate, which requires at least 22pc of car sales by manufacturers to be electric

Ford has also warned it could cut back on sales of petrol cars in the UK.