CDK Global, owned by Brookfield Business Partners, underpins virtually every element of auto retailers’ day-to-day business

Last week the Bank of Canada cut its benchmark interest rate by 25 basis points, the first cut since the beginning of the pandemic in 2020. In light of this, we at DAC thought it would be timely to take a look at consumer price index data from key parts of the automotive industry. For April 2024 the picture continued to be one of increases, albeit with one glaring exception. Leading the gains was insurance premiums, the CPI for which increased 6.8% compared to April 2023. Gasoline, not far off, also saw a 6.1% increase. In the critical maintenance category, prices increased 4.2% with parts also up 2.9%, showing an automotive aftermarket that continues to see price gains.

The picture does change when looking at vehicle prices, however, with the CPI for the purchase of new passenger vehicles up a modest 1.4% compared to April 2023. Used passenger vehicles, which had experienced sharp price growth during the semiconductor-related shortages, saw CPI decline 2.3% as of April 2024. “While consumers have seen some easing in the price growth for vehicles themselves, the costs in the aftermarket as well as gas and insurance continued to climb” commented Andrew King, Managing Partner at DAC. He continued, “Hopefully price pressures will continue to ameliorate, and interest rates fall further, as the automotive market enters a somewhat unsteady period.”

Azarov, D. (2024, June 12). Auto industry prices continue to grow as rate cutting begins. DesRosiers Automotive Reports, DesRosiers Automotive Consultants

Dealers are having to shift as used car prices decline and borrowing costs remain elevated.

Anomaly is perhaps the best way to describe what happened to the used vehicle market between 2020 and 2023. The COVID-19 pandemic and resulting lockdowns caused OEMs and their suppliers to curtail production. For dealers, this had several implications. Firstly, it reduced the availability of new vehicles for a few years. Secondly, it put pressure on lease returns and used vehicles. Plus, with public transit ridership falling off a cliff due to social distancing requirements, a whole host of new vehicle shoppers entered the market.

The result? Rising vehicle demand and with it, transactional prices. In fact, prices became so elevated that in many cases, three and four-year-old vehicles were commanding more money than they did when new. Dealers frequently found themselves scrambling for used inventory and when they were able to get it, turned record profits for each unit sold, resulting in a seller’s market the likes which have not been seen since the days following World War II—a time when the public was literally starved for cars.

Elevated costs

Since 2022 however, the market has shifted yet again. Rising inflation and the Bank of Canada’s aggressive interest rate hikes put pressure on both dealers and consumers. Today, we’re faced with a situation where prices for used vehicles remain elevated, but new car inventory is improving. This means that dealers are having to adjust their approach to used car operations yet again.

According to Daniel Ross, Senior Manager, Industry Insights & Residual Value Strategy, at Canadian Black Book, with used vehicle inventories improving in the U.S., there has been less interest in shipping cars across the border. From a peak of 374,000 units crossing from Canada to the U.S. in 2021, that demand has consistently declined, easing used vehicle demand here at home and facilitating price declines. As a result, we’ve seen lower retail pricing and an increase in the number of days to turn inventory, as dealers look to maintain buyer interest and shift metal off their lots.

Below pre-pandemic levels

Jeff Schulz, Executive Vice President, Marketing at LGM Financial Services, notes that while the availability of used vehicles has improved, it’s still significantly below pre-pandemic levels. Plus, with the overall economy slowing and interest rates remaining elevated, many consumers are scaling back on big-ticket purchases, including vehicles.

This means dealers will often need to be creative when it comes to moving used inventory. “It’s important for dealers to understand their local market,” says Schulz. “You need to know what kinds of vehicles are in demand and do your best to cater to that customer base.” In B.C.’s lower Mainland, for example, Schulz notes that fuel efficiency is currently a top priority for many consumers, so focusing on fuel-efficient vehicles and those that are likely to appeal to a more environmentally conscious buyer such as hybrids and PHEVs likely make more sense. In other markets, small SUVs and pickups might be in high demand, so it’s important for dealers to understand what is selling and what isn’t and prioritize sourcing their used inventory accordingly.

Higher payments

At AutoTrader, Baris Akyurek, Vice President, Insights and Intelligence, notes that the firm’s data points to a 2.1% year-over-year decline in used vehicle prices, yet at the same time, the cost to finance those vehicles has increased. For consumers, Akyurek notes that in February 2019, it cost $450 per month to finance the average used vehicle. By February 2024, that had increased by 36.5% to $636. Additionally, affordability issues are stretching loan terms—with the average duration increasing from almost 68 to over 72 months between February 2019 and 2024.

Additionally, for dealers, floor plan financing is significantly more expensive today, so, as Daniel Ross at Canadian Black Book notes, finding the right vehicles that can be quickly turned is far more critical now than even a couple of years ago, meaning that dealers need to focus on more efficient remarketing efforts and should not be tempted to hold out for the “right” buyer. “The repercussions of keeping inventory too long or holding out on price for that right buyer highly expose consistent profitability,” he says. “Stick to the process enforced at the dealership and improve upon areas that slow things down.”

F&I considerations

According to Jeff Schulz, dealers can satisfy both consumer demand and improve inventory turn by creating solid F&I packages for their used vehicle customers. Given that pricing is still expensive, as are financing rates, with many consumers looking to stretch the loan terms to improve affordability, anything to address consumer peace of mind when it comes to a used vehicle purchase is paramount. That’s why Schulz says that certified pre-owned programs are proving particularly popular, demonstrating that the vehicle has gone through a rigorous, multi-point inspection program prior to being certified for sale.

Additionally, Schulz notes that loan protection can be a good option since it can provide assurance in the advent of disability or job loss, especially as the economy continues to slow. Extended warranties can also make a significant difference. “Used vehicles tend to have higher rates of mechanical failure, so an extended warranty provides added assurance to the customers,” Schulz explains. “Furthermore,” he says, “they can also serve as a retention tool, bringing the customer back to the dealer for service and eventually their next vehicle.”

Evans, H. (2024, March 20). Used vehicles: Navigating through a changing market. Autosphere. https://autosphere.ca/dealerships/2024/03/19/used-vehicles-navigating-through-a-changing-market/

Declines in prices for the Canadian used wholesale market is less than the prior week — including for the overall car and truck/SUV segments, according to Canadian Black Book’s latest report covering the week ending on May 25.

The market was down -0.23% this time, compared to the previous week’s -0.38%. The overall car category fell -0.33%, which is slightly less than the prior period’s -0.35%. And truck/SUV segment prices were down -0.14%, a decline that is less steep than the -0.40% of the prior week. No segments experienced an increase in values for the week.

“The Canadian market continued to decrease, with declines that (were) less than the prior week,” said CBB in its update. “Supply is building with stable demand for vehicles at auction on both sides of the border.”

In the United States, CBB said the market continues to report “normalcy,” with overall declines on-pace with pre-pandemic behaviour. “However, the trends aren’t one size fits all, with the trends of auction inventory and conversion rates varying from lane to lane, depending on the seller’s strategy and offered inventory.”

Back in Canada, premium sports cars experienced the least declines with -0.04%, followed by sports cars at -0.13% and near luxury cars with -0.18%. The most notable decrease came from luxury cars (-0.88%), followed by compact cars (-0.58%) and sub-compact cars (-0.55%).

As for trucks/SUVs, CBB said the segments with the most notable depreciations were full-size luxury crossovers/SUVs (-0.29%) and compact crossovers/SUVs (-0.26%). In addition, three categories showed no change in pricing: sub-compact luxury crossovers, minivans, and sub-compact crossovers.

The average listing price for used vehicles, as per the 14-day moving average, was around $33,900.

The full report is available here. 

dealer, C. auto, & Phillips, T. (2024, May 28). Used market price declines less intense as supply builds. Canadian Auto Dealer. https://canadianautodealer.ca/2024/05/used-market-price-declines-less-intense-as-supply-builds/