In the search for more affordable smaller rides, Canadian new-vehicle buyers, surprisingly, aren’t actually spending less money. In some cases they’re shelling out more.
“We’re in this kind of weird state right now where it’s the middle of summer, we’re selling more cars, there’s more supply, there’s more incentives, but the average payment on financing went up,” said Robert Karwel, J.D. Power Canada director of customer success for the data and analytics division.
Monthly payments rose because Canadians have expensive tastes, he said, noting that half-year sales data had been delayed by the CDK data breach and Canada Day holiday.
During the first half of 2024, “We started selling a cheaper mix of vehicle in terms of segmentation, but not by trim,” Karwel said.
That means Canadians are buying smaller or more economical vehicles, but still with all the bells and whistles available on top-level trims.
“That's essentially responsible for transaction pricing,” Karwel said. “You’ve now altered pricing in Canada and that’s the dominant pricing effect for the first half.”
The average transaction price is down a full three per cent to $47,900 through the first six months of the year versus $49,500 from the same period last year. The average lease payment is $790 per month through the first six months, versus $800 from last year. Financing, however, is up to $885 from $870, “and that’s more concerning,” Karwel said.
RISING MATERIAL COST
Karwel said automakers are dealing with inflation and the rising cost of glass, steel and rubber, and “all that’s required [for] building and producing a vehicle.
“The financial burden to consumers just slowly keeps building and it gets a little bit harder to afford a vehicle,” he said.
To ease that burden, automakers have turned on the taps to incentives.
“Incentive growth is now essentially trying to get the payment back to a more normal level for consumers to help lower that monthly payment as it’s a big part of the family budget,” Karwel said.
Incentives increased by a third in the first half of 2024, up to $5,600 per transaction.
“The highest growth area of those incentives has been into leasing. We’ve backed off those 24-month leases a little bit going into the end of the second quarter,” Karwel said.
“We’re back into our more traditional 48-month, and 60 started to pick up as well — and that’s just purely a payment driven reality.”
Interest rates are having less of an effect because the industry and consumers have adjusted to them over the last two years, but “trade values have been eroding for about a year now.”
So, consumers are “bringing less equity, less down payment to their next vehicle,” meaning the monthly payment stays higher.
“We knew those highs under the post-COVID environment for used vehicles to retain value weren’t sustainable,” Karwel said. “We suspect that’s going to be a little bit more of a dominant issue in the second half of the year, and that also speaks to affordability.”
INVENTORY IMPROVEMENT
Meanwhile, inventory is only a small concern today, and it varies brand by brand. The number of days to turn is “pretty good” at 51, meaning a new vehicle sits, on average, on a dealer lot for 51 days before it’s sold. Last year, that number was 38. Two years ago, it was 25.
“Everyone wants to chase share, and everyone wants to build more units and chase that. So, this isn’t surprising,” Karwel said. Luxury vehicles “are a little bit of a different story. If we talk about them, they’ve increased to about 65 to 70 days to turn.”
This downward adjustment from luxury and large vehicles means “anything that’s a small utility is red-hot,” while fullsize trucks and SUVs sit longer. Small sedans are also selling like hotcakes, needing just 38 days to turn.
“It’s kind of a better business proposition for dealers that work with brands that still sell them,” Karwel said. “It’s almost bizarre to talk about passenger cars.”
JULY SALES STRONG
Automakers sold an estimated 161,000 vehicles in July, up 11 per cent from the same month a year ago. But the rebound should be taken with a grain of salt, warns DesRosiers Automotive Consultants (DAC)
“To be fair, the July 2023 comparable was not a great month, so some sort of gain was definitely expected,” the company said in a statement.
Monthly sales figures are estimates because most automakers report numbers only quarterly. Ford Canada reports annually.
DAC said that an increase was expected because it’s possible some June sales were captured in July data because of the mid-June cyberattack on CDK Global’s dealer management system, which ground to a halt digitized recordkeeping at hundreds of dealerships for almost two weeks.
DAC called July’s total “respectable but still noticeably below” the 173,519 sold in July 2019, just before the COVID-19 pandemic.
DAC said the seasonally adjusted annual sales rate (SAAR) for July came in at 1.77 million. That’s higher than every month in the second quarter, but lower than every month in the first quarter.
“We will be watching closely to see how August performs and if some stability returns to the marketplace,” DAC said.
Karwel, meanwhile, remains optimistic.
“In a nutshell, it’s going to be OK. We’re going to move more units this year than last year, but everything’s really expensive, and things are starting to slow,” he said.
“The affordability of vehicles is going to start to become a little bit more important.”
