When will used cars become affordable again?

 

Only those living under proverbial rocks would be unaware of the dramatic surge in vehicle prices over the last three years. The laws of economics applied before, during, and after the pandemic.

Pairing reasonably healthy demand with limited availability initially eliminated new vehicle incentives. Before long, MSRPs were rising in response to a critical inventory shortages and high demand. The forces of a global supply chain crunch eventually propelled inflation to uncomfortable levels. Central banks responded with elevated interest rates, which, when combined with record-high MSRPs, sent average monthly payments to the moon.

All the while, Canada’s pre-owned vehicle market was tied at the hip to the new vehicle market. Much as budget-oriented pre-owned shoppers prefer to see used prices reflect their own preconceived notions of what a 10-year-old car should cost, the new and used markets do not — and can not — exist in their own independent vacuums.

It only takes consideration of a tiny corner of the market to understand why the many moving parts of different automotive markets actually move in response to one another. Use the Toyota Sienna and some rough math as an example. In pre-pandemic 2019, an entry-level Toyota Sienna was priced at $35,295. We can safely assume that five years later the Sienna has lost 50 per cent of its value. Call it $18,000 for a five-year-old base Sienna. Remember, it’s 2019, so Sienna production is strong enough to sustain demand at dealers, which means trade-ins are flowing and there is, consequently, decent selection of both new and pre-owned Siennas. You might have even scored a deal.

Fast forward to 2023 and the price of an entry-level Sienna has grown by nearly 20 per cent; rising interest rates driving payments even higher. Now, however, Sienna production isn’t strong enough to sustain demand at dealers, which means trade-ins aren’t flowing and there are, consequently, few Siennas available on the pre-owned market. That supply crunch is exacerbated by a three-year period of limited new availability. We can assume therefore that the five-year-old Sienna now isn’t losing 50 per cent of its value; it’s more like 40 per cent at worst. In other words, a five-year-old Sienna is now worth roughly $7,500 more than it would have been in pre-pandemic 2019.

But here’s the kicker: when rising new vehicle prices pull prices for late-model pre-owned vehicles higher, prices for older vehicles are pulled higher, as well. These factors are amplified when availability decreases; calmed when availability increases.

But that’s just one hypothetical example. What’s really happening in Canada’s used vehicle market, and is there any reason to believe used cars are going to be affordable anytime soon? Based on current market reports from AutoTrader.ca, J.D. Power Canada, and Canadian Black Book, here are 10 key numbers that illustrate just how warped Canada’s pre-owned market has become.

Average used car price

In each of the third-quarter’s three months, Canada’s average pre-owned prices decreased, month-over-month. Yet the average pre-owned price — $39,155, according to AutoTrader, is still nearly $9,000 higher than it was at this time in 2021.

How many weeks do you need to work to pay off a used car?

AutoTrader says that in the third-quarter of 2023, the average income-earning Canadian required 33 weeks of wages to afford a used vehicle. Think that’s high? It’s 55 weeks of income for a new vehicle..

What’s the average used pickup price?

One of the first automotive-related signs of the supply chain crisis in 2020/2021 was the sudden lack of availability of new pickup trucks. Pre-owned truck prices skyrocketed. Although the surge in prices has stabilized somewhat, average pre-owned pickup prices in the third-quarter were up 7-per-cent, year-over-year, according to AutoTrader. That translates to an eye-watering $48,787.

The most expensive place in Canada to buy a used car

Although vehicles are expensive, well, everywhere, pre-owned prices are highest on the west coast; lowest on the east coast. The average price of a pre-owned vehicle, AutoTrader says, is now $43,003 in British Columbia, up 3 per cent from 2022’s Q3. That’s about $7,500 more than the average price of a pre-owned vehicle in Atlantic Canada.

How does the average new car price affect used prices?

How is it possible for pre-owned prices to be so high? Pre-owned prices don’t necessarily rise hand-in-hand with new vehicles prices, but there are strong correlations. J.D. Power data shows that the average price for new vehicles in Canada has remained above $50,000 in nine consecutive months, from March 2023 through November.

Are new vehicle prices rising?

AutoTrader says the average new vehicle list price is now 43-per-cent higher than it was just two years ago in the third-quarter of 2021.

Canadian are borrowing money to purchase new vehicles

Automakers can justify this continuation of high new vehicle prices — consequently pulled pre-owned prices higher — because Canadians continue to show their willingness to make the math work. How? It’s not by paying out of pocket — Canadians are borrowing. And they’re borrowing over extended timelines. In November, J.D. Power says, 58 per cent of new vehicle transactions were financed with terms of at least 84 months.

Average monthly car payments are on the rise

With prices pulled higher and interest rates higher than much of the car-buying public has ever seen, payments invariably rise, as well. The average monthly payment on a used vehicle now, AutoTrader says, is around $650. That’s 40 per cent higher than it was at the onset of the pandemic.

Will used price decrease?

In the week ending December 2, the 48th week of the year, pre-owned wholesale vehicle values underwent the greatest weekly price decrease of the year, according to Canadian Black Book.

Which used vehicle category is increasing most?

The category experiencing the biggest year-over-year increase in pre-owned prices isn’t minivans, trucks, or SUVs — it’s passenger cars, with prices up 8 per cent compared to the third-quarter of 2022. “We are witnessing higher demand for more affordable/fuel-efficient vehicles,” AutoTrader says, a quest that historically drives buyers toward smaller and less costly sedans and hatchbacks.

Meanwhile, new cars are out of reach for so many people. The average price of a new passenger car is 52-per-cent higher this year than last, strikingly higher than the increases in other categories: 20 per cent for minivans, 16 per cent for SUVs, and 7 per cent for trucks. The cause, of course, isn’t just inflationary pressure — it’s the fact that affordable cars are disappearing from the market.

Can pre-owned vehicles become affordable? For that to happen, new vehicles have to become at least somewhat more affordable. And for that to happen, new vehicles have to become more available.

While “inventory levels are still down compared to pre-COVID levels,” according to AutoTrader, they’re rising rapidly. Year-over-year, inventory levels of key categories are far stronger now than they were at the end of 2022 Q3: 51 per cent for pickups, 70 per cent for cars, 71 per cent stronger for SUVs, and 101 per cent for minivans.

 

Cain, T. (2023, December 13). 10 Facts and figures that prove Canada’s used car market is still warped. Driving. https://driving.ca/column/driving-by-numbers/10-numbers-prove-canadas-used-car-market-warped-2023

 

 

 

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The Canadian used wholesale market saw its largest decline in prices yet, at –1.56%, for the period ending on Dec. 2. The prior week’s decline was only -0.38%, and Canadian Black Book’s Market Insights data indicates that the 2017-2019 average of the same week, a mere -0.31% in comparison, was significantly less steep.

Segment-specific, cars fell by -0.88% (compared to -0.23% the prior week), and truck/SUV segment prices declined –2.23% (compared to -0.53% the previous period). Not a single segment’s value increased for the week. In its report, CBB said the Canadian market “continued to decrease, and the overall decrease was the largest seen this year and more than six times the historical average.”

 

In the cars category, mid-size cars experienced the most significant decline in pricing (-3.11%), followed by near-luxury cars (-1.20%) and sports cars at (-1.13%). For trucks/SUVs, four segments had a 3% or greater depreciation: compact luxury crossovers/SUVs (-3.57%), compact crossovers/SUVs (-3.56%), full-size luxury crossovers/SUVs (-3.42%) and mid-size crossovers/SUVs (-3.00%).

CBB said supply remains low and demand for vehicles at auction on both sides of the border is decreasing. They also noted that upstream channels continue to tap into that supply before it can be made available to wholesale market.

“Most segments saw a change in average value of more than $100 this week as the truck and SUV segments fell the most,” said CBB. “We see that smaller vehicles have been outperforming their larger alternatives, as possibly both Canadian consumer budgets tighten and arbitrage risk to exporters continues to rise.”

They also noted that conversion rates were “quite low” during this reporting period, with some observed sell rates as low as 9% or as high as 49%. However, most were less than 30%. “Last week we saw less sellers dropping floors, which has been contributing to lanes with lower sell rates.”

 

 

dealer, C. auto, & Phillips, T. (2023, December 8). Used market decrease “more than 6x the historical average,” says CBB. Canadian Auto Dealer. https://canadianautodealer.ca/2023/12/used-market-decrease-more-than-6x-the-historical-average-says-cbb/

 

Wholesale vehicles price drops lessened a bit last week, with an average decline of 0.38%, says Canadian Black Book.

CBB data shows car segment prices dropped by 0.23%, while pickups and SUVs prices fell 0.53%. This continues a trend of truck depreciation being higher than that of cars, except for the small pickup segment.

Although depreciation rates weakened last week, still none of the 22 segments CBB tracks saw prices increase during the week.

Seeing the biggest price declines were the full-size cars (down by 1.03%), followed by the subcompact crossover and subcompact luxury crossovers with drops of 1% each.

Looking at car segments, all but one declined in price, as the premium sporty car segment didn’t change at all from the week prior. CBB head analyst Daniel Ross told Auto Remarketing Canada in a recent interview that sporty car prices are holding stronger than most during the second half of 2023.

Prestige luxury cars and luxury cars saw the least impactful price drops, down 0.01% and 0.08%, respectively. Full-size cars dropped the most, with a decline of 1.03%, followed by sporty cars (down 0.75%).

Trucks experienced slightly larger depreciation last week. Subcompact crossovers (down 1.03%) and subcompact luxury crossovers (down 0.99%). Minivans followed closely behind. Midsize crossover/SUVs (down 0.94%) and full-size pickups (0.80% decline) dropped more significantly, as well.

Price drops this past week followed historical norms for the season, CBB said. Supply remains low, keeping depreciation at a minimum.

That said, as far as the supply problem for new cars goes, there may be hope on the horizon. CBB analysts said the global semiconductor shortage is improving over last year as the numbers show an expected global cut of 2.466 million vehicles this year. This is significantly down compared to last year’s final number of 4.388 million.

“With only 20,000 more vehicles to be cut from production for the remainder of the year, the scenario has improved continuously throughout 2023,” CBB said.

CBB reported many segments last week in the lanes saw a drop of more than $100 in average value last week.

Once again, conversion rates were quite low this past week, according to CBB.

Some observed sell rates were as low as 6% and as high as 49% but most were less than 30%.

CBB once again saw sellers dropping floors, which has been contributing to lanes with lower sell rates.

The average listing price for used vehicles was slightly down week-over-week, as well, CBB reported, as the 14-day moving average was at roughly $37,900.

In the U.S. market, prices are dropping at a quicker rate for wholesale. Last week, car and truck segments fell by an average of 1.49%, while cars fell by a rate of 1.82%, which both represent larger declines than the week prior.

 

 

Auto Remarketing Staff. (2023, November 30). Depreciation in used-car prices slows down last week. Auto Remarketing. https://www.autoremarketing.com/arcanada/depreciation-in-used-car-prices-slows-down-last-week/