Bank of Canada rate cuts to spur rising vehicle sales, but what about prices?

AutoTrader says the used vehicle market tends to be more sensitive to interest rate changes than new cars, trucks, and SUVs. (Hispanolistic via Getty Images)

Used vehicle prices are set to keep falling, even if the Bank of Canada paves the way for a rebound in sales by easing car loan costs via its trend-setting interest rate, according to AutoTrader.ca.

The online vehicle marketplace says the average used car price nationwide fell 8.3 per cent year-over-year in June, to $36,342. Used car prices in Canada peaked at $39,725 in January 2023, according to the company’s data.

Ontario and Quebec saw the deepest discounts last month, at 10.5 per cent and 10.1 per cent year-over-year, respectively. Atlantic Canada experienced the smallest annualized decline, at 3.5 per cent.

Based on average Canadian automotive pricing data collected from hundreds of thousands of used vehicle listings monthly on AutoTrader in June 2023 and June 2024. (AutoTrader.ca)

AutoTrader says the used vehicle market tends to be more sensitive to interest rate changes compared to new cars, trucks, and SUVs, adding that demand has softened since the third quarter of last year, when the BoC’s policy rate was at a 22-year high. This was most notable among lower-income consumers, who typically have less household savings, and spend a greater percentage of their earnings on essentials like food and shelter.

Canada’s central bank delivered back-to-back 25 basis point rate cuts in June and July. Earlier this month, Governor Tiff Macklem signalled more could be on the way this year, assuming inflation eases as policymakers expect.

“We believe there will be an uptick in the sales in the second half due to the much-expected interest rate cuts,” Baris Akyurek, AutoTrader’s vice-president of insights and intelligence, told Yahoo Finance Canada on Tuesday.

“How would that impact car prices? We believe there is quite a bit of inventory in the market, which in turn should ‘absorb’ the increase in demand,” he added. “As such, we don’t expect a big change in the overall pricing direction at this time.”

According to AutoTrader’s monthly price update, June saw “significant” discounts applied to used vehicles. It says prices dropped for 31 per cent of its used vehicle inventory, the largest amount in a single month since the start of the COVID-19 pandemic.

June also saw the number of used vehicles on the website climb 28 per cent year-over-year.

When it comes to new vehicles, AutoTrader says prices peaked at $67,817 in September 2023. As of June, the category averaged $66,807, down 0.8 per cent on an annualized basis.

According to the report, new vehicle sales are still recovering from the semiconductor shortage and supply chain issues from 2020 to 2023, which resulted in 1.5 million fewer new cars sold. Last month, sales were impacted by a cyber attack that caused extended outages for thousands of North American dealerships.

“We expect strong new car sales for the next couple of years. They were up in double digits last year, and so far this year on a year-to-date basis. New car listing prices have been stable, but affordability has improved due to lower interest rates,” Akyurek said.

“Once the market stabilizes—that is, pent-up demand is satisfied and inventory levels return to normal for most brands—we expect prices to rise in line with inflation, as was the case before the pandemic.”