Young buyers piling on auto-loan debt

Canadian auto debt continues to rise, but what’s most surprising is that young buyers — a group thought to have little interest in vehicle ownership — are shouldering much of the credit.

Credit-reporting agency TransUnion came to the conclusion when it analyzed consumer debt in 2017 for its quarterly Canada Industry Insights Report.

According to the report, the average Canadian consumer’s auto balance stood at $20,160 in the fourth quarter of 2017, a year-over-year gain of a 1.47 per cent, with Generation-X, millennial and Generation-Z buyers increasing their non-mortgage debt by as much as 23 per cent year over year. Baby boomers, by contrast increased debt by just less than one per cent.

The report supports a warning by credit-rating company Moody’s that longer-term car loans and auto debt are putting a strain on Canadian banks’ credit quality.

The numbers also contradict the assumption that younger consumers are instead keen on Uber and Lyft ride-hailing services as well as hourly rentals. Indeed, people living in major urban centres will gravitate to such modes of transportation, but many still find themselves desiring ownership, despite costs associated with parking, insurance and general maintenance.

For automakers, dealers and lenders, that would appear to be welcome news. Millennials account for more of the auto market than ever before, and Matt Fabian, director of research and analysis at TransUnion Canada, anticipates that Gen Z-ers will eventually make up about 30 per cent of the population.

Given younger buyers’ inclination to complete as much of the shopping process online as possible, Fabian said it will be crucial for dealers and lenders to adjust their business models to accommodate that.

“We’re starting to see, when we talk to our clients in the automotive space, they’re starting to think more about the digital space and how you rebuild your businesses for that.”

HEADWINDS APPROACHING

Fabian said the continued growth of the auto market in Canada — which hit record sales of two million units in 2017 — puts it in a different light than the market in the United States, which is experiencing retreating sales. He said it was unusual that Canada has experienced continued growth for this long amid a cool-down in the U.S. market.

“We had seen similar pace of growth in the U.S. for a long time, but that slowed down,” he said. “We usually trail a little bit [behind the United States in terms of the timing of decline], but not by this much.”

He said growing Canadian debt has largely been the result of a strong economy and low interest rates.

Canadian household debt has reached record highs since the recession — nearly a decade ago, now — though Fabian says that delinquency rates, including auto, among all age groups except Gen. Z declined in 2017 compared with 2016.

While saying that the Canadian economy is expected to remain strong this year, he added that lenders and auto dealers should be on the lookout for headwinds that could weaken growth.

EYES ON INTEREST RATES

For instance, the Bank of Canada is expected to continue to increase interest rates in 2018. In addition to making loans costlier, higher interest rates could have a spillover effect into the auto industry in another way.

“When interest rates go up and you have a variable-rate mortgage, your disposable income covers a little less,” Fabian said, meaning consumers might hold off buying a new vehicle or instead simply spend less.

He said that U.S. trade policy and the uncertainty over renegotiations of the North American Free Trade Agreement could have an impact on auto lending. If, for instance, the United States imposes tariffs on Canadian softwood lumber or steel, regions heavily dependent on those sectors could take a hit economically, making consumers less likely to buy a new vehicle.

“We might start to see regional pockets where people are under some economic stress,” Fabian said.