With average used car prices finally coming down after reaching a record high in June, shoppers who were priced out of the market or frustrated by empty dealership lots may be wondering just how low prices will go.
Experts predict that used car prices in Canada will continue to fall, but they’ll remain higher than they were before the pandemic threw the auto market into disarray.
“Although we believe there’s going to be further softening in the market, we do not expect the prices to go back to pre-COVID levels any time soon,” said Baris Akyurek, director of marketing intelligence at AutoTrader.ca, an online marketplace for new and used vehicles.
In February 2020, a month before the pandemic was officially declared, the average asking price for used cars on AutoTrader’s Canadian website was almost $27,000. In 2021, prices skyrocketed, driven by myriad factors including supply shortages and strong demand, before finally peaking at $38,097 in June 2022.
Prices fell in July, and, beginning in August, have been dropping at an increasing rate month-over-month, according to AutoTrader’s data. Between September and October, average asking prices dropped 1.1 per cent to $37,141.
Despite that, used cars were still 20 per cent more expensive in October than they were at the same time last year, and are well above prepandemic levels.
Andrew King, managing partner of DesRosiers Automotive Consultants, said he’s not expecting prices to revert to their historical norms. “[Used vehicle prices] are unlikely to get back to pre-COVID levels. It’s just not going to happen,” King wrote in an email.
Manheim’s third-quarter Used Vehicle Value Index report – which tracks the prices dealers pay for cars at auction – showed a decline in both the United States and Canada since January. But prices on the Canadian wholesale market have been steadier through the second and third quarters of 2022.
DesRosiers is forecasting a “limited decline” in used vehicle sales for 2023, assuming new-vehicle supply improves, King said. He cited rising interest rates, a potential recession and an increasing supply of new vehicles as key drivers of the predicted slowdown.
Almost one-third of consumers who recently bought a used vehicle said they did so because the vehicle they were looking for wasn’t available new, or there was a long waiting list, according to a survey conducted for AutoTrader in 2022. Assuming the supply of new cars does improve next year, those types of buyers would likely abandon the used car market, reducing demand.
The Bank of Canada’s interest rate increases, which make borrowing money to buy a car much more expensive, are also having a cooling effect on the used car market.
In general, the used market is more sensitive to rate increases, wrote Robert Karwel, senior manager of J.D. Power’s Power Information Network. “The reason why,” he explained in an email, “is that there are nearly zero incentives for used car purchases.”
In the new car market, automakers can soften the effect of rate increases by offering incentives like cash rebates or below-market interest rates. Used car buyers, however, are generally exposed to the full force of rate increases.
In addition, interest rates on used car loans are typically higher than on new cars. “The result can be that more people start taking longer loans on used vehicles, in order to keep the payment at a certain monthly range,” Karwel added. Some borrowers with poor credit ratings could be priced out of the market completely.
If you’re in the market for a used car now, there is some good news: Buyers have more choice.
The supply of used cars has been improving since February, Akyurek said. There are now 24 per cent more used vehicles for sale on the company’s website than there were at this time last year.
In an effort to increase their used vehicle inventory, dealers have been buying cars from private sellers, Akyurek said, rather than relying on wholesale auctions, as would have been the case before the pandemic. And dealers have also been selling cars they wouldn’t have stocked before the supply shortages, such as older models or those with higher mileage.