While the new-car market for electric cars shows encouraging signs of growth — taking 16.6% of the U.K. market in 2022 and outselling diesel for the first time — there are worrying signs in the used-car market as residual values (RV) head downwards at an alarming rate.

And, as ever when it comes to electric vehicles, it’s Tesla occupying the headlines with drops of £3,000 recorded in December.

According to automotive research and analysis firm cap hpi’s Car Market Overview for January, Tesla models have witnessed some of the greatest downward movements, with Model 3 reducing by -9.6% (around £3,000) at three years and the newer Model Y down -5.9% (around £3,100) at 12 months old.

The Tesla Model 3 first arrived in the U.K. some three years ago, and those first vehicles are part of the issue as fleets begin to defleet. Tesla’s supply also tends to be end-quarter loaded, so when models are defleeted, they tend to be in batches, rather than fed orderly into the market.

However, Tesla has heaped further pressure on its used values by announcing new car price reductions on its Model 3 and Model Y, slashing prices by as much as £7,000 on January 13. (There were also price reductions across Europe, the U.S., Middle East and Asia.)

A statement for Tesla read:

“Our focus on continuous product improvement through original engineering and manufacturing processes have further optimized our ability to make the best product for an industry-leading cost. As we exit what has been a turbulent year of supply chain disruptions, we have observed a normalization of some of the cost inflation, giving us the confidence to pass these through to our customers.”

Commentators have suggested that the brand’s once-dominant position on EVs is coming under pressure as electric car sales grow and other brands offer competing alternatives. But it should also be remembered that sales in China have been under considerable pressure too, with price reductions in China offered in the first week in January to support flagging demand as domestic rivals eat into Tesla’s sales, so there will be excess inventory around.

Nevertheless, Paul Hollick, chair of the Association of Fleet Professionals, welcomed the price cuts but also warned on the potential damage to RVs:

“While they are not without problems, these price cuts are generally being welcomed by our members. Simply, they make mainstream EVs more affordable to businesses and should put pressure on other manufacturers to take similar action in the coming weeks and months. In an EV market that has seen prices rising almost month-on-month recently, this is good news, we believe.

“However, it has also introduced an element of disorderly marketing for Tesla, which is never good news for residual values, and it will be interesting to see the reactions of both leasing companies and the pricing guides in the next few days.”

However, Tesla RVs are not the only electric car maker with quickly softening used values.

cap hpi also notes in its January report that premium manufacturers were seeing shaky prices, with the Audi Q4 e-tron down -5.9% (about £3,100) at one year, while values for the Mercedes-Benz EQC have reduced by 10.6% (or some £4,500) at three years.

In the mainstream market, the same downward trend is evident, cap hpi saying the Renault Zoe was down 6.9% (about £900) at three years, VW ID.3 down 5.8% ( some £2,000) at one  year, the Nissan Leaf down 9.0% (around £1,500) at three years, and finally the MINI Cooper S E down 8.8% (or around £1,650) at three years.

Should the market be concerned at such price drops?

While Tesla has further factors now at work, cap hpi suggests that high retail demand (and hence higher used values) are the underlying cause of this RV turbulence. Its report ends saying:

“Most of these are models where recently used retail values were greater than cost new, and in some cases by a considerable margin, so reductions were expected, although they are now happening quicker than anticipated, partly due to the fact that they stayed higher for longer than expected, and also because we are now seeing a number of new car offers.”