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

 

 

 

Increase your sales with our offer for your customers, and also win a free stay in Costa Rica for yourself.

 

We are offering a one week stay in a beautiful property located in the pacific coast of Costa Rica to you and your customers. All car dealers that book finance deals with us from December 21, 2023 to March 20, 2024 and reach 15 funded deals during that period of time will receive an email confirmation with the voucher for your stay.

Each of your customers that sign a finance contract with us will receive a ticket for a raffle for a week stay on the property. The raffle will be drawn in our offices on March, 21, 2024.

If you would like to see more pictures of the property visit their website www.vacationrental-cr.com/gallery.

*Conditions apply.

 

Conditions for dealers:

• The deals that count for this contest will be the ones received and funded from September 15th to November 30th, 2023.
• The voucher is for 1 week reservation during January to December of 2024 subject to availability.
• The weeks of Christmas, New Year and Easter Holidays are excluded.
• This voucher is only for the stay, does not include flights, transportation or meals.
• Once the reservation is made, if you need to cancel it or modify it you need to send written notice 30 days prior to your stay.
• Stay approximate value is $2100.00 USD.

 

Please print a copy of the contest’s flyer and posted in a visible place in your dealership for your customers to see. You can also place it in your vehicle windows to promote sales.

Customer Flyer

 

Customer conditions:

• The offer is for contracts signed from December 21, 2023 to March 20, 2024
• The voucher is for 1 week stay during April to December of 2024 subject to availability.
• Easter, Christmas and New Year Holidays are excluded.
• This voucher is only for the stay, does not include flights, transportation or meals.
• Once the reservation is made, if you need to cancel it or modify it you need to send written notice 30 days prior to your stay.
• Stay approximate value is $2100.00 USD.
• You can visit www.vacantionrental-cr.com for property’s pictures and location.

 

 

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/

 

Customer financing is a way to let customers pay for goods or services in installments instead of up front. When you offer financing to your customers, you make your vehicles more affordable and put their dream car within reach.

Consider that 2 out of 3 customers are probably borrowing some portion of their purchase. Asking the right question from the start of the process will lead to more sales, and at a higher profit per sale.

Many customers do not actually realize which cars they can afford. They may say that their budget is $10,000.00, but they are doing a payment calculation in their head.

To give you an example, a 2013 model can be finance for 3 years. If the car sold for $10,000.00, the payment would be $190.00 bi-weekly with $0 down. A 2016 model can be financed for 5 years. If the car sold for $15,000.00 the payment would be $180 bi-weekly with $0. The client would be paying less for the newer and more expensive vehicle. Unless you know how your customers are calculating their budget, you might miss the sale.

Salespeople should be trying to move the conversation from a round number to payments from the start. It is much more difficult to move to payments after talking solely about the cash price first. Starting the conversation with a smaller amount will open your customer’s mind to other possibilities.   

Financing also offers a better opportunity for profit. You can ask the customer to pay $1,000.00 plus tax for a warranty right away or ask $13 per payment over a 3 year term. Which scenario is more likely to lead to a sale? This also applies to after-market products like winter tires, rust proofing, rims, and all kind of products.

Sit down with your customer and begin your conversation with a simple question, “What is your monthly budget?” You can better asses what the expectations your customer has in regard to what they can afford.

Auto financing is the easiest way to increase sales and profits. There is a direct relationship. A higher ratio of finance contracts per total sales will lead to more cars sold, and higher average profit.

 

Risman, M (2023, November 24). Why to finance vehicles instead of selling for cash? Part 3. Ontario Underwriters Newsletters. https://on-u.org/newsletters/

Part 2: Benefits for customers

There are two main ways of buying a new car: in cash (paying the total cost in full), or with car financing. Although it might seem like common sense to just pay upfront with cash than taking out a loan, it’s not always the case. Even if you have some cash in reserve, taking out a competitive auto loan can have a lot of advantages which include:

• Most of the time your customer will say that they are paying from their cash savings, they are using another method of borrowing to pay you for the car (usually from a line of credit).
• Not taking funds from a line of credit or savings account gives a little liquid flexibility and leaves room for an emergency fund to draw on.
• Taking out a car loan spreads the payments over a longer term, increasing the chances to buy a newer/better car instead of being restricted to the cash available.
• May improve credit score. Signing off on a loan that can be paid off is a great way to watch your customers credit score grow. Adding an auto loan can diversify the credit mix and slightly boost the credit score.
• With financing, your customers will own 100% of the vehicle at the end of the repayment term, yet they will still have the cash sitting unspent in their account or leave a credit line untouched, just waiting for a rainy day.
• The majority of auto-loans in Canada are open with a fixed rate while credit lines have variable rates. Cars are a depreciating asset, and most people pay only the minimum payments, which leaves the customer in a negative balance.

In summary, the auto dealer ALWAYS benefits from a client who finances their auto purchase. Dealers who also know how to explain the benefits of financing for that customer, will make move sales, and have a higher profit per sale.

In the last part of this series we will explain how to sale financing to customers.

 

 

Gonzalez, N. & Risman, M (2023, November 17). Why to finance vehicles instead of selling for cash? Part 2. Ontario Underwriters Newsletters. https://on-u.org/newsletters/

Given the announcements last week by the Federal Government regarding Canada’s immigration targets, we at DAC thought it would be timely to look at the Canadian new light vehicle sales market from a population perspective. Due to the pandemic and semiconductor shortages, sales decreased dramatically in 2020 and remained down as vehicle shortages held back the market in 2021 and 2022. However, amidst this environment, one factor that does not receive enough consideration is the rapidly increasing Canadian population.

Between 2017 and 2022 the number of Canadians of driving age (defined broadly as 15+ years) increased by a stunning 2.2 million people. Putting this into a sales perspective, sales of new light vehicles among reporting manufacturers reached 67 units per 1000 people (aged 15+ years) in the peak sales year of 2017. With declining sales and an exploding population this number decreased by a remarkable 32% by 2022, to only 45 vehicles per 1000 driving aged population. “When population growth is taken into account, the ground that the Canadian new light vehicle sales market needs to re-capture widens” commented Andrew King, Managing Partner at DAC. “However, 2023 has seen a pattern of sustained sales increases thus far and rising population should support additional market demand in the medium and long terms.”

 

 

Azarov, D. (2023, November 8). The Impact of Canada’s Exploding Population on Vehicle Sales. DesRosiers automotive reports.

Benefits for Used Car Dealerships

The advantages for a used car dealers to offer financing are clear and well know since almost 50% of all car sales are financed. To name a few of the reasons why offering financing to your customers is a good idea, please continue to read the following points:

• By offering financing to customers, businesses can boost their sales, and increase their average sales transaction size. Financing allows customers to make regular, affordable payments toward the cost of a big-ticket item, instead of paying the full price up front. Taken in consideration that according to the AutoTrader Price Index Report, the average new vehicle price in June 2023 was $66,288, 21.3% above the price in June 2022. As for used cars, the national average is currently $39,645, 4.1% higher than it was the prior year. Flexibility in customer payments will make a big difference. Cost is often the first consideration for customers shopping for a big purchase: they want to know if vehicle they want will fit within their budget.

• By leveraging auto finance, you can eliminate the sting of sticker shock for your customers and shift the conversation away from total costs. Instead, you can show customers how low monthly payments can allow them to buy exactly what they want. Financing allows you to re-frame the sales conversation, shifting the focus away from budget constraints to the value the purchase will bring.

• Financing increases a customer’s purchasing power. Not only does financing make it easier to close a potential sale, but it’s also a powerful tool for upselling. You can demonstrate to customers how a small increase in their monthly loan payments can allow them to afford upgrades or additional products. The option to add after market products, like warranties, winter tires, rust protection packages, etc. will increase the profitability of the transactions.

• Offering consumer financing can give you a competitive advantage, allowing smaller dealerships to compete with franchises and Automotive Groups. Your business can attract new customers by offering financing plans. If a prospective customer is shopping around for a big purchase, they may be more likely to choose your company over a competitor that doesn’t provide financing options. It can also help you earn repeat business, as customer credit programs often motivate customers to return for future purchases. A study shows that 93% of buyers that use consumer financing for the first time would use it again.

• Allowing finance as an option to manage better your customer budget, they can take advantage of a sale that can be perceived as a “Good Offer” without worrying about affordability in that regards. Fortunately, some new and used cars have dropped in price, and car buyers looking to save money can still find deals. It is expected that average car prices will reduce gradually, but inventory has remained an issue due to ongoing supply chain disruptions and inflation.

For a used car dealer, finance could make the difference between and a day cleaning cars or a day with a successful sale.

In our next part of this 3 part article, we will be reviewing the benefits of financing for customers.

 

 

Gonzalez, N. review by Risman, M (2023, November 3). Why to finance vehicles instead of selling for cash?. Ontario Underwriters Newsletters. https://on-u.org/newsletters/

 

The used vehicle market is influenced by a complex set of intertwined variables – and in the most recent DesRosiers Used Vehicle Report – we explore these dynamics and what they will mean for future used vehicle sales in Canada. One such unique variable has long been the flow of vehicles between Canada and the United States. Following the financial crisis, vehicle exports to the United States were negligible while Canadian imports of used vehicles exceeded eighty thousand units in 2010. However, since 2013, the situation has reversed and the United States has seen used vehicle imports levels soar to unprecedented levels. DAC has recently obtained the most up to date data on this variable that clearly shows continued record levels of US imports in the post pandemic timeframe – on a scale never seen previously.

A second critical dynamic amongst the 30+ variables we track in the report is the projected number of off-lease vehicles in Canada. Declining vehicle sales in the 2017-2022 period compounded with rapidly falling lease rates mean that the number of off-lease vehicles that will enter the Canadian used vehicle market will plummet in the coming years – further starving the used vehicle market of supply.Andrew King, Managing Partner at DAC commented “In putting together our forecast for the used vehicle market we track a wide array of dynamics including used vehicle trade flows, off-lease rates, new vehicle availability, consumer demand, vehicle pricing and many more. By integrating these variables into our model, we have developed a detailed outlook for the market in the coming years and an analysis of the market by channel and brand.”     Azarov, D. (2023, October 18). Used Vehicle Exports to the US Continue to Soar while Off-Lease Volumes Plunge. DesRosiers automotive reports.

Canadian used wholesale market prices have not slowed, with prices down -0.26% for the week ending on Sept. 2 compared to the prior week’s -0.30%, according to Canadian Black Book’s latest Market Insights report.

The car segment was down -0.09% (similar to the previous week), and the truck/SUV segment slipped -0.42%, which is slightly less than the prior week. Three out of 22 segments’ values were up for the week.

In the United States, the overall car and truck segments were down -1.40% last week and -0.86% the prior week. The volume-weighted car segments declined -1.44% versus the previous -0.83%, and the volume-weighted truck categories decreased -1.38% from -0.87% the prior week.

In Canada, eight of the nine car segments experienced a decline in pricing, with the biggest decreases coming from prestige luxury cars (-0.28%), luxury cars (-0.18%), and sub-compact cars (-0.17%). The one increase came from mid-size cars (+0.14%).

For the truck/SUV categories, 11 of the 13 segments showed a decline —  notably full-size vans (-0.93%), full-size crossovers/SUVs (-0.74%), and compact luxury crossovers/SUVs (-0.68%). On the up side, compact vans (+0.61%) and small pickups (+0.06%) experienced an increase in value.

The average listing price for used vehicles, as per the 14-day moving average, was at approximately $38,250. The analysis is based on around 189,000 vehicles listed for sale on Canadian dealer lots, according to CBB.

You can read the full report here.

 

 

Lefko, P., & dealer, C. auto. (2023, September 6). Used vehicle price decreases continue, decline slightly less this week. Canadian Auto Dealer. https://canadianautodealer.ca/2023/09/used-vehicle-price-decreases-continue-decline-slightly-less-this-week/