Car prices rose 50% since 2020, faster than trucks or SUVs. Why cost-conscious buyers are running out of options

Open this photo in gallery:

The average listed price of a new car in Canada has soared by 50 per cent since 2020, industry data shows. The spectacular jump is a sign of wide-ranging challenges facing auto manufacturers that are leaving cost-conscious consumers with fewer options.

The figure comes from automotive analytics company Canadian Black Book and refers strictly to the lighter passenger vehicles. The average price of a new car as of the end of September was nearly $60,000, the numbers show, up from just under $40,000 in 2020. By comparison, prices for SUVs and trucks rose by 25 per cent over the same period, a still hefty but much smaller increase.

The spike in new car prices mainly reflects changes in the lineup of vehicles available for sale and the impact of a global semi-conductors shortage that continues to haunt the industry, experts said.

Part of the story is about automakers ending the sale of smaller subcompact and compact cars in recent years, said Daniel Ross, senior manager of industry insights and residual value strategy at Canadian Black Book. Removing some of the most affordable cars from the marketplace effectively skewed average prices higher, he said.

At the same time, manufacturers also beefed up their offering of cheaper subcompact SUVs, which dragged average prices in the SUV and trucks category lower, he added.

The shift was partly in response to a long-standing consumer preference for SUVs over cars, according to Mr. Ross.

“The idea is that they’ve taken a car that consumers don’t necessarily want,” he said, “and they introduced a whole different car on the other side of the coin – on the SUV side – named it something different, but it serves the same purpose. It’s got a higher ride height and the option for all-wheel drive, and it’s something that Canadians want to drive.”

But the lineup changes are also the result of automakers prioritizing the sale of higher-margin vehicles amid production constraints tied to the limited availability of microchips, said Guido Vildozo, senior manager for light-vehicle sales forecasting in the Americas at S&P Global, a market research firm.

While other industries have shaken off pandemic-era supply chain constraints, the impact of the chips shortage is still evident in the auto industry. The hundreds of microchips in each vehicle power its electrical, safety, entertainment and other systems.

Globally, production capacity has bounced back to 88 million vehicles a year, roughly where it was before the pandemic, said Mr. Vildozo. But that’s far below the mark of 100 million a year that S&P Global predicted prepandemic that the industry would reach in 2022.

What’s holding down production has a lot to do with semi-conductors, according to Mr. Vildozo. It’s not just that automakers lost their spot in the priority line with microchip producers when they slashed production at the onset of the pandemic.

Those logistical logjams also uncovered supply chain issues that had been building up well before COVID-19, Mr. Vildozo said. Namely, investment in semi-conductors had been focusing on production of the more advanced and high-margin microchips that go into products like laptops and gaming consoles rather than on the analog microchips automakers need.

“These would be parking sensors, power windows, it’s a very simple stuff,” but also an essential component for building vehicles, Mr. Vildozo said.

Today the semi-conductor industry is playing catch up, spurred in part by generous government incentives. In the United States, for example, the Biden administration has pledged nearly US$53-billion to ramp up the sector domestically. But new investments will take time to translate into higher-production capacity, Mr. Vildozo said.

Canada’s semiconductor industry seeks renaissance from AI, shifting geopolitics

Meanwhile, automakers need more microchips than ever. In 2021, around 1,500 semi-conductors would go into a new car, Mr. Vildozo said. Today that number is closer to 1,700. And the transition to electric vehicles is driving automakers’ demand for chips even higher. A battery-powered vehicle needs between 2,200 and 2,400 chips, according to S&P Global.

The good news for car shoppers on a budget is that some of the offering of compact vehicles is expected to come back, Mr. Vildozo said. In addition to capacity constraints, automakers are also facing consumers burdened by high inflation and interest rates, he said.

But S&P Global expects that in Canada ambitious zero-emission vehicle sales targets will contribute to keeping average vehicle transaction values elevated, as pricier electric vehicles will account for a greater share of sales.

“Prices will definitely remain elevated for Canada,” Mr. Vildozo said.

Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.