Economic Outlook: Vehicle Prices Still High

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Rebekah Young Scotiabank Economics
Rebekah Young, Director, Fiscal and Provincial Economics, Scotiabank. PHOTO Rebekah Young

Although inventory is starting to improve, supplies remain limited, pushing up demand and pricing.

Canadian auto sales saw a bit of rebound in early summer after third-wave lockdowns were lifted, and it looks like auto production is starting to come back, but prices for new and used vehicles are going to remain high for a while yet.

New-vehicle inventory should build in the final quarter of 2021 and the first of 2022 and used vehicles should start returning to normal levels after that—but we don’t believe we’ll see the usual balanced conditions until closer to the end of 2022.

Depressed sales

Even though new vehicle sales improved on a month-over-month basis after the most recent lockdown, the sales rate remains depressed as inventories have largely been depleted.

The microchip shortage is hitting some manufacturers harder than others. American-based automakers are more exposed, given supply chain (and inventory) practices, while Japanese automakers reinforced their processes after the 2011 earthquake and tsunami when they had a chunk of their chip production wiped out.

It’s estimated that 80 percent of the production cuts due to chip shortages are related to Detroit-based companies.

The European automakers aren’t immune, either. Sales of luxury vehicles have been strong, given the majority of economic impacts hit lower-income households.

Many potential buyers of luxury vehicles meanwhile saw savings, home values, and other equity rises over the course of the pandemic.

Impetus to buy

This wealth effect usually benefits luxury vehicle sales, plus there may be some impetus to buy before the new luxury vehicle sales tax comes into effect. These automakers are having serious inventory challenges due to the chip shortage, plus the high demand for their vehicles.

The pace of used-car price appreciation started to slow in July but remains elevated, and we only expect used car prices to come down after the regular flow of new vehicles returns.

The microchip shortage is playing a large role, sending customers to used-car lots when new vehicles aren’t available, but the auto rental companies are also a major factor. When the pandemic first hit and few people were travelling, rental companies liquidated their fleets.

When restrictions lifted, they were competing with retail buyers for limited inventory, resulting in some cases even buying used vehicles to repopulate their lots.

Rental fleets

Fleets represent one-fifth of Canadian new-vehicle sales, and 50 percent of that typically goes to rentals.

Normally we’d be at the 12-to-18-month window when rental companies replace their vehicles and repopulate the used-car markets, but that isn’t happening. Meanwhile, the new vehicles currently being added to these rental fleets won’t be available for the used market for another 12 to 24 months.

Another factor that will keep a floor under used-vehicle prices is that we typically see these sales running counter-cyclical to economic conditions. As we head into 2022, there should be less pandemic-related government support that may push more potential buyers to used vehicle markets.

Some dealers are using a profit strategy over volume strategy, and it’s working in this environment, but they are butting up against the limits of high pricing.

It’s going to be a tough few months for dealers until they can replenish their inventory, but that should translate into stronger sales once they do have vehicles to sell.

Rebekah Young is Director, Fiscal and Provincial Economics, at Scotiabank.

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