Could we be in for a repeat of last year when it comes to vehicle prices?

Wiarton Willie, our famous spring predicting albino groundhog, didn’t exactly make his prediction for 2021.  According to the great Groundhog Day scandal, he passed away before his big event and in the style of Weekend at Bernie’s, no one was aware until months after. While the intent was to avoid disappointing Willie’s fans, turns out we received a less than legitimate prediction for 2021.

Willie is dishing out his revenge from above, as 2022 is here, as it’s beginning to feel like Bill Murray’s version of Groundhog Day with history repeating itself. The emergence of the Omicron variant saw restrictions and school closures re-imposed. Citizens are again scrambling to find COVID shots. There’s also another Olympics. Towards the end of 2021, the auto industry looked like it was climbing out of its gopher hole, but now it appears we may still be in it for a while longer.

As far as predictions go, I’m quite optimistic for 2022. Dare we ask what we can expect for this spring and beyond?

Too many buyers, too few vehicles

At the core of the industry market fundamentals in Canada, we still have the same challenges here in 2022—lots of buyers and not enough vehicles of both new and used flavours.  As a result, prices of new and used vehicles have risen to levels previously thought unattainable.

Last year, used vehicle prices increased an astounding 39% on average as tracked by the Kelley Blue Book Canada team.  At a recent Manheim auction day, our team noted that a perennial rental fleet favourite sedan is now selling for $10,000 more than just a few months earlier!

Today, the average price of a vehicle listed for sale in Canada is about $30,250, which is over $8,500 more than what it was in December of 2020.  Keep in mind this is just the average amount, as price gains vary widely depending on the model and age.  So much for a vehicle being a depreciating asset!

The used car supply in Canada has historically been tighter than what it would be naturally due to the large volume of our used stock exported to the U.S. market.  This has continued as U.S. vehicle prices remain strong.  Although the Canadian dollar has strengthened to $0.80 from lower levels in the early days of the pandemic, many exporters are still turning a profit.  This is not surprising in an environment where brand new or lightly used vehicles at auction are then being sold for significantly higher than the shiny new MSRP.  The rules of supply and demand have never been more obvious!

Pre-pandemic levels?

A frequent question I am asked lately is when will used car prices fall back to earth, or at least to pre-pandemic levels.  For almost two years on the supply side, there has been a shortfall in global production of almost every type of vehicle and every brand. This will forever keep supply tight for that cohort of vehicles (i.e., model years 2022, 2021, 2020) and help maintain strong prices. Given current news around the pandemic it is reasonable to assume 2023 and likely even 2024 models will be in shorter supply.  Furthermore, with rental car companies buying less stock in 2020 and 2021, and OEM’s leasing far fewer units, theses long standing sources of used stock are greatly diminished.

On the demand side, consumer confidence, as reported by Nanos, fell back to where it was in February 2021 after significant gains and a peak in July.  However, in the auto space, demand remains strong as consumers in many cases can only hope to “order” a vehicle with a delivery date many months off.  Unemployment is now at 5.9% which is very close to the pre-pandemic 5.7% of February 2020.  All things considered; demand is in good shape.

It is reasonable to assume vehicle pricing will see a negative price adjustment at some point. A soft-landing for prices is the most likely scenario and one that may take a number of years to play out. The key to it for used car prices is that the new car supply first has to be resolved. You cannot have one without the other. It will still take time for industry and the global economy to catch up on meeting demand to recover from the pandemic impact, and as a result, used car prices (and new car transaction prices) will remain high for quite some time.

So, here’s hoping 2022 sees less “Groundhog Day” and more “Back to the Future”.

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Brian Murphy is Managing Director, Kelley Blue Book & Data Solutions, Cox Automotive Canada and Brazil. You can reach him at [email protected]