Automaker are steering consumers toward long-term financing over shorter-term leases, a strategy that is boosting new-car sales in Canada while creating some risks.
“All of the strengths that we see in the marketplace are being driven by a singular tactic or go-to-market strategy: zero per cent [financing], 84 months, with additional cash on the hood,” said Robert Karwel, J.D. Power’s senior manager of automotive practice in Canada. “That’s hard to beat on payment.”
Leasing transactions in late July comprised 25 per cent of the new-vehicle market, down from about 30 per cent before the pandemic, said Karwel. In April, they had dropped to 22 per cent.
New-vehicle sales have also gained strength, falling just an estimated five per cent in July. That compares with a 75-per-cent free-fall three months earlier, according to DesRosiers Automotive Consultants.
“It’s attractive cash purchase and finance deals that consumers are seeking, and we have responded to that trend,” Steve Milette, CEO of the traditionally lease-heavy Nissan Canada, said in a statement to Automotive News Canada.
There was no indication that automakers would let up on such offers any time soon. Along with fewer leases, the average transaction price rose 5.5 per cent in the second quarter, to $37,500, over the same period last year, said Karwel.
While 84-month offers have lured shoppers back into showrooms, they also keep them out of the market longer than shorter-term financing or leasing terms, said Karwel.
It would then be incumbent on automakers and dealers to entice buyers back to the market sooner or risk depressing the new-vehicle sales market in the long term.
“It’s a little bit problematic from that side, but we’re not going to argue that right now in Canada, that’s the winning strategy,” Karwel said.
Automakers began pushing zero-per-cent, long-term financing, in part, because they lacked confidence in predicting residual values during the early months of the pandemic, when showrooms and auction lanes were forced to shut down.
They also offered to extend leases on about 40,000 vehicles that were due to expire in both April and May, said Karwel. At Hyundai Canada, for instance, about 11 per cent of customers with leases set to expire between March 1 and July 28 took advantage of the company’s lease-extension program, a spokeswoman said.
The extensions are “creating a bubble of leased cars which have yet to come back, on top of the vehicles scheduled to come back in July, August and September,” said Karwel.
Whether those vehicles will be able to retain their residual value is uncertain, said Karwell. But, used-vehicle pricing is up almost two per cent – an indication that the market might be able to absorb the thousands of vehicles that will be coming off leases this quarter, he said.
INCENTIVE SPENDING UP
Many customers, especially those inclined to choose leasing to lower their monthly payments, could opt for low annual percentage rate (APR), long-term financing. And others, especially customers who now work from home, might decide to leave the market entirely, especially if their returning lease is a second vehicle.
“Conceivably a bunch of people are not going to re-lease a car right now,” Karwel said. “They might go to the used market to save a little money. But they might not buy a new car.”
According to J.D. Power, 43 per cent of 84-month loans in June had an APR from zero to 0.9 per cent, up from 17 per cent of those loans a year earlier. And incentive spending in the second quarter rose 10 per cent, driven in large part by those long-term loans.
But some auto executives predict leasing rates will stabilize in the remainder of the year.
In a June interview, Hyundai Canada CEO Don Romano said the company “didn’t have any idea” in April and May about residuals going forward.
“We didn’t know if the market was going to be flooded with used cars,” he said. “And I can tell you right now, dealers can’t get enough of them. Just the opposite occurred.”
The situation improved as more volume headed through auctions in June and July, said Brian Murphy of Canadian Black Book.
“There’s a lot of bidding going on for vehicles,” said Murphy, the company’s vice-president of research and analytics.
John Hairabedian, CEO of the Quebecbased HGregoire, said his dealership group continued to buy used vehicles during the darkest months of the pandemic, on the expectation that prices would rise as COVID-19 cases in Canada declined.
“That’s exactly what we saw,” Hairabedian said. “I think residual values are going to be just fine. There’s strong demand for used cars in the marketplace right now.”