Car-shopping turned into a nightmare for many Canadians during the pandemic – and the bad dream isn’t over yet.
Global automotive supply chains, which were thrown into disarray during COVID-19 by factory shutdowns and parts shortages, meant dealership lots had few vehicles on offer. Meanwhile, consumers unable to find new cars and trucks turned to the used-vehicle market, sending prices there to unprecedented heights.
With the global health emergency now over, supply chains have largely recovered, but pent-up demand and high interest rates mean buying a car – either new or used – is more expensive than ever.
Canadians spent more than $46,000 on average to buy a new vehicle in May, up from $35,000 in 2019, according to research firm J.D. Power. For used cars and trucks, average prices are hovering a little above $35,000, down only slightly from a pandemic high of nearly $40,000, according to automotive analytics company Canadian Black Book.
At the same time, pricier auto loans are making it increasingly hard for Canadians to handle those high purchase prices with manageable monthly loan payments.
“There really isn’t a deal to be had in the new-car market,” said Daniel Ross, senior manager of industry insights and residual value strategy at Black Book. And as more demand flocks to the used-car market, prices there also remain elevated, he added.
Part of the problem is a long-term shift in auto manufacturing. Even with vehicles now rolling off factory floors and into showrooms at a more normal pace, prices are high in part simply because cars are more expensive to make, said Charles Bernard, lead economist with the Canadian Automobile Dealers Association. “Vehicles are basically computers on wheels.”
And electric vehicles, which are particularly complex to make, are further driving up average prices, he added.
So far, though, those high price tags aren’t keeping consumers at bay, according to Mr. Bernard. The market is still working its way through demand from Canadians who weren’t able to buy a car during the pandemic because of widespread shortages.
“They’ve been waiting for cars for so long that I don’t think the patience is there any more to maybe wait and see the prices go down,” he said.
High prices for new vehicles are also putting upward pressure on used-vehicle values, said Black Book’s Mr. Ross. That’s in part because prohibitive price tags for brand new rides are forcing more people to buy used, he said. In part, it’s also because higher manufacturer’s suggested retail prices are also driving up the expected value of used cars in some cases, he said.
While the average price of a used passenger vehicle has come down from pandemic records, prices remain 20 to 25 per cent above pre-COVID levels, Mr. Ross said.
And for consumers who need to finance their car purchase, higher overall lending rates are adding another significant financial squeeze.
Auto loans on new cars had an average interest rate of 6.6 per cent in the first three months of 2023, more than double the 3-per-cent low in the third quarter of 2020, according to data from Equifax and Dealertrack Canada.
The average loan rate for used vehicles climbed to 10 per cent at the beginning of 2023, up from a low of 7.5 per cent in the second quarter of 2021, the same data shows.
Meanwhile, zero per cent financing – a hallmark of car ads in the era of low interest rates – has virtually disappeared. Such incentives, which used to make up 10 to 15 per cent of auto loans on new vehicles, now account for less than 1 per cent of them, said Rebecca Oakes, vice-president of advanced analytics at Equifax Canada.
For new vehicle purchases, Canadians were paying an average of $749 a month on loans issued between January and March of this year, according to the Equifax and Dealertrack Canada data. That’s an increase of more than 20 per cent from an average loan payment of $611 a month for loans issued at the beginning of 2020.
But the impact of pricier vehicles and expensive borrowing is even starker in the used-car market, Ms. Oakes said. Here average auto loan payments jumped by more than 30 per cent to $625 a month in the first three months of this year, from $473 in the same period in 2020.
What’s more, while the average loan term for new vehicles has remained roughly the same – around seven years – over the past three years, Canadians are now increasingly resorting to longer terms when buying used vehicles.
The average term length for a loan on a pre-owned car was 73 months in early 2023, up from 69 months before the pandemic.
Those large balances and longer loans on used vehicles could become a headache for both consumers and lenders if resale prices decline steeply once supply and demand in the market go back to normal, Ms. Oakes said.
When used-car values finally come back to Earth, consumers could get stuck with loans worth much more than the vehicle they’re driving, she said.
That’s a concern for lenders, too, because “if people start missing payments – the lenders, even if they repossess the vehicle, there’s no value in it.”
With demand for used cars and trucks still so strong right now, those steep value declines aren’t an imminent concern, Ms. Oakes said. But, she added, “that’s something that we’re worried about in a couple years down the line.”
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