Beside Houses,Car prices are skyrocketing in Canada!

At the height of the epidemic, companies were forced to close owing to supply chain problems and a scarcity of microchips, leaving many vehicle dealerships with vacant lots and consumers waiting for orders.
Now, new and used automobile costs are rising as a result of low inventory levels and an increase in demand. According to AutoTrader’s Price Index Report on New Vehicles, the average price of a new car in June 2023 was $66,288, a 21.3% rise over June 2022. The average cost of a used car was $39,645, which was 4.1% more than it was at the same time last year.

So, is buying a new car out of reach luxury for many Canadians?

It surely is for many people who are struggling in this post COVID world. But car prices are not the only issue when looking to buy a new or used car. As you have heard from all over the news, the borrowing rates are on the rise as well. It is not very unusual to see car loans as high as 9.5 -10%! Borrowing money was cheap before COVID, now it’s not! What does that mean? It means people will be forced to spend less, rethink their strategies and perhaps hold on to old vehicle.

Industry and governmental data reveal that more Canadians and Americans are being priced out of the country’s new vehicle market even as inflation is subsiding and the worldwide chip supply bottlenecks are starting to ease. The lowest level in eleven years was reached in the lowest 20 percent of earners’ spending on new autos. According to the most current data from the 2021 Consumer Expenditure Survey, which is not adjusted for inflation, expenditure on new automobiles by the wealthiest 20 percent increased to its highest level ever, dating back to 1984.

And here is the catch of post COVID world! Wealthy are getting wealthier and spend more while middle class and middle low class are loosing ground.

Supply vs. inflation

According to data from DesRosiers Automotive Consultants, Canadian new automobile dealerships had, on average, just 42% of the inventory they would have had before the pandemic in the first quarter of 2023. Although it is an improvement over the 19% they were at the same time last year, it is still less than half of what may be deemed average. There was a severe shortage of semiconductors throughout most of 2020 and 2021, which had an influence on the availability of everything from iPhones to refrigerators and autos. Auto manufacturers concentrated on using their limited resources to produce large, costly vehicles that are the most profitable to them rather than less expensive entry level sedans with poor margins. Although Young claims that the semiconductor shortage is improving, it is still ongoing, and in the meantime, prices for everything from rubber and steel to copper and aluminium are significantly higher than they were previously.

Another factor contributing to high automobile prices is the industry-wide shift toward electric vehicles. Everything electric is selling for an exceptionally exorbitant price. They are more costly and more difficult to make. They require materials, parts, and technical elements that weren’t included in the earlier vehicles.

Because there is customer demand for EVs, dealers can essentially charge whatever they want for them. Usually the wait lists are much shorter if you ask for a combustion engine vehicle.

When will car prices drop?

This is probably the most asked question these days! As well as when will housing prices drop. The answer is, don’t loose hope but probably it will not happen any time soon! As the cost of borrowing increases, many believe that less people will buy cars and directly the price will come down. Well that is partially true. People who can not afford a new car will stop buying but as the study shows while 20% of people in the lower economic status stop buying, the 20% in the higher economic status spend more. And that is why cars and houses probably will not go down any time soon!

What we are going to see in the near future is more likely to be that more people will not be able to buy basic life necessities. For the third time in two years, average transaction costs decreased below MSRP. On its face, it is fantastic news. However, during the past three years, automobile costs have risen dramatically.

Because these factors are totally out of the consumer’s hands and because even experts can only speculate as to the cause, it is impossible to predict when automobile costs will decline.

Are used cars thing of the future?

In late 90’s and early 2000’s we could see a lot of old cars on Canadian roads, it is just recent phenomenon that almost all cars in Canada are new or younger than 5 years. As the cost of borrowing was very cheap, buying a new car was a better economical solution that keeping and fixing used vehicle. But, what will happen as the cars get more expansive and cost of borrowing gets more un-economical? Well, probably just the opposite. People will be forced to keep their used vehicles and start fixing them.

As we do not have a crystal ball, the economy could turn around once again, hopefully. And we all can live a pre-pandemic live.