Vehicle affordability to clash with increasing inventories in 2023

New-vehicle sales in 2022 fell 8.8 per cent compared with 2021, but where the market heads this year is anyone’s guess amid record-high transaction prices, inventory woes and a looming recession.

“The big question that lies ahead will be the balance between improved vehicle inventory, pent-up demand and deteriorating economic conditions,” said Andrew King, managing partner at DesRosiers Automotive Consultants. “It could well be that vehicle sales in Canada climb even as the country enters a recession.”

Sales of 1.50 million light-duty vehicles in 2022 were reported by the Automotive News Research & Data Center in Detroit. Few forecasters are going out on a limb for 2023, but U.S.-based AutoForecast Solutions predicts sales of 1.6 million. And Scotiabank Economics on Jan. 18 said in its Global Auto Report it expects Canadian sales to reach 1.65 million.

New-vehicle pricing continues to rise, even in the face of interest-rate hikes.

A large number of automakers have nearly doubled their rates to anywhere between 4.99 and 6.99 per cent, depending on the length of the loan, since the Bank of Canada began raising its overnight rate.

These increases present a potential affordability problem, warned Robert Karwel, senior manager, automotive practice Canada, at J.D. Power.

The average transaction price through November 2022 stood at $45,000, up six per cent from 2021’s record high of $42,500. It crept up again in December, coming in at $49,900. The annual average isn’t yet available.

LONGER LOAN TERMS

The average monthly car payment now stands at $700, and that includes financing, and loan and lease payments on all new vehicles sold in Canada.

“How much elasticity is in that number? No one knows,” Karwel said.

The average monthly payment for full-size trucks alone is nearly $1,000.

“We’ve got a lot of high-end trucks out there.”

To keep paying top dollar, more buyers are opting for 84- and 96-month financing. The latter now makes up 10 per cent of the market, up from six per cent before the COVID-19 pandemic.

Canadians were able to afford high prices when interest rates were “stupid low,” Karwel said.

“We could handle the pricing because prices were ameliorated by low interest rates. Our concern for the new year is payment affordability will be greatly affected because automakers are still spending near-record lows on incentives.”

He said automakers are only offering about five per cent of the MSRP in incentives. In 2019, it was about 15 per cent.

“Without more incentive money to offset central bank actions to curb inflation, we might hit a payment affordability crisis,” Karwel said. “The key context is not falling off a cliff, but cooling off.

“How much pricing and payment...do you think we can keep driving upwards as we go into a recession this year?”

Shahin Alizadeh, CEO of the 11-store Downtown Auto Group, said incentives are starting to come “in dribs and drabs.”

“It’s a different market” today than even a year ago.

“The significant savings customers had, based on [low] interest rates because they were borrowing from credit lines or OEM captives, have disappeared now,” he said.

He called today’s buyers more cautious and said they’re opting for fewer bells and whistles to keep costs down.

WORST SALES YEAR SINCE 2009

The 1.50 million light-duty vehicle sales in 2022 were less than the 1.55 million sold in pandemic-hampered 2020. And it was the worst sales total on record since 2009, when automakers sold just 1.46 million amid the Great Recession triggered by the financial crisis.

Still, most dealers enjoyed financial success in 2022.

Without providing a figure, Karwel said dealers posted record profitability in 2022.

“Dealers are making very good money,” he said.

Alizadeh said 2022 was good for him, but not as good as 2021.

“I think the industry celebrated very surprising financial results. Margins were high, inventory was tight, the used cars were strong,” he said of 2021. “Twenty twenty-two was not the same. We held our own in 2022, we were slightly off of 2021, and that was a bit surprising because we expected to see a bit more inventory.”

Hyundai Canada CEO Don Romano agreed.

“Our dealers had a record year for profitability. I wouldn’t say it’s excessive. It’s where it should be. I don’t think there are any Hyundai dealers out there who would tell you they’re disappointed with 2022 in respect to profitability. They sold fewer cars and made more money. That’s a good combination.”

STELLANTIS, GM CANADA POST 2022 GAINS

Hyundai sold 112,559 new vehicles, down 11.1 per cent.

“That said, I would like to have more volume, a lot more volume,” Romano said, “But I want to see volume grow at a reasonable pace. Six months ago, [our dealers] were screaming for more. But now they’re asking for more.”

That’s because higher interest rates mean it’s more expensive for dealers to carry more inventory, even though it’s still needed.

“High dealer gross and low incentives is telling you there’s still a fair amount of demand out there,” Karwel said.

“The inventory situation is normalizing and improving for some brands and there’s a continuation of very dismal inventory and supply issues with another brand,” said Alizadeh, who declined to elaborate. He said Detroit Three inventory “is much less of an issue.”

Stellantis’ 2022 sales were up 4.8 per cent to 169,799, while fourth-quarter sales were down two per cent to 38,568. Ford’s 2022 sales of 240,325 vehicles outpaced all automakers, but that was down 1.3 per cent from 2021. Its Q4 sales fell 9.7 per cent to 54,841.

General Motors had the greatest percentage increase for 2022: 4.8 per cent to 228,003 vehicles. The fourth quarter was up a whopping 41.6 per cent to 55,724 vehicles.

“Improving inventory levels, along with high customer demand for our product lineup, were key contributors to our success,” Sandor Piszar, vice-president, sales, service and marketing for GM Canada, told Automotive News Canada in an email.