Auto crisis haunts used car market
As supply shortage means higher prices, fewer choices
By Scott Deveau, Financial Post February 14, 2013
Potential car and truck buyers will flock to Toronto this week to check out the latest and greatest vehicles at the Canadian International Autoshow at a time when auto enthusiasm is rising and sales are expected to reach near-record highs in 2013.
But anyone hoping thats going to put a bevy of cheap used cars on the market is out of luck. In fact, used car and truck prices have steadily increased over the past few years in the aftermath of automakers pulling back on leasing and fleet sales during the recession.
That has not only created a shortage of newer used vehicles in the marketplace, but quite a headache for dealers.
"We've seen a significant shortage of good, used vehicles in the last few years," said Bob Pierce, director of the Used Car Dealers Association of Ontario.
The appreciation in the value of used vehicles also comes at a time when affordable leasing rates and low-interest financing is available for new vehicles, sometimes stretching out by as long as 96 months.
"The supply's been tight. The good ones are really expensive and then you've got all the programs on the new cars," Mr. Pierce said. "You look at a 2008 or a 2009 model, and right on the same page as that ad you see you can get a new one where someone wants to give you $45,000 for four years interest free, its a little tough to jump to the used one."
The shortage of supply in the used vehicle market today was created in the aftermath of the recession and the credit crunch when automakers, in particular the Detroit Three, drastically slashed their leasing activities in 2009 and reduced their reliance on high-volume, low-margin fleet sales, to car rental companies, for example.
In 2007, prior to the onset of the recession, the total number of vehicles sold in Canada on lease or into fleets hit a high of more than 995,000 vehicles before the industry entered a state of crisis. Roughly 40% of the new vehicles at that time left that lot on leases, according to Dennis DesRosiers, president of DesRosiers Automotive Consultants.
But in 2009, the number of vehicles sold in Canada on lease dropped to just 6%, and in the same year, the number of vehicles sold on lease or to fleets dropped to roughly 328,000. The typical vehicle in Canada sold on lease or fleet will enter the used market three or four years later. As a result, four years after the bottom of the recession, there has been a dramatic drop off in the availability of vehicles coming of lease or out of fleets to a low of 445,000 vehicles this year, roughly half the number in 2009.
While it's true that the quality of vehicles has also extended the life of the average vehicle on the road in Canada, that wont be sufficient to offset the dramatic decline in leased vehicles and those sold into fleets, Mr. DesRosiers said.
"You can see the loss of supply in the used car market," he said. "Thats why used car prices have been going up quite dramatically."
Carlos Gomes, Scotiabank senior economist, tracks used car and truck prices across the country. He noted in the first three quarters of 2012 [the most recent data available] the price of a used vehicle at least three years old the segment that is experiencing the greatest shortage grew by double-digits while those less than a year old jumped just 7%.
The price increases on one-year-old models have been tempered somewhat by the hefty incentives in the market on new vehicles, which have jumped nearly $2,000 a vehicle since late 2011, Mr. Gomes said.
That will be good news for buyers in the used market toward the end of 2013, said Josh Bailey, director of market analytics for Canadian Black Book.
He said he believes used car and truck prices will likely peak or already have this year as more vehicles become available in 2014 and dealers continue to offer hefty incentives on new cars tempering demand for the used ones.
"We hit a stage sometime last year where the appreciation has petered out, because smart shoppers will do the math and see that they'll be a lot further ahead to buy a new car than they would be to buy a used car," Mr. Bailey said.
But he noted that if the automakers do decide to eventually pull back on the incentives, prices may once again spike.