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U.S. demand bumps used-vehicle values in Canada

 

This was supposed to be the year that used-vehicle values would begin their descent from all-time highs in Canada.

But, that hasn’t happened, and the United States might be to blame.

Used-vehicle values remain near all-time highs, years after low supply in the wake of the last recession, which sent prices rising. Both the Canadian Black Book Used Vehicle Retention Index and the ADESA Canada Used Vehicle Price Index, two of the leading wholesale market indicators, showed used vehicles retaining their values near record levels in June; a trend that has proven to be remarkably stable over the past several years.

Tom Kontos, chief economist for the auction group ADESA, said values have remained high due in large part to U.S. buyers buying Canadian used vehicles. He said about 25 per cent of ADESA Canada’s buyers have U.S. addresses, higher than the historical 20-per-cent average, though lower than the 30-per-cent figure seen two years ago.

“Initially, what elevated used vehicle values in Canada was the lack of supply, and what’s maintained it at those levels has been U.S. demand,” Kontos said.

It was initially thought that U.S. demand in Canada would weaken as an influx of used vehicles entered American auction floors and dealerships, thus growing supply and sending values down.

 

AMERICAN INTEREST

But Kontos said the exchange rate has kept American buyers interested in the Canadian market, even as supply across the border rises. The loonie has weakened against the U.S. dollar for much of this year, in part, due to fears of a trade war between the two countries. The dollar was hovering between 75 and 77 U.S. cents for most of June and July, compared with about 80 cents at the start of 2018.

“The expectation that I had was that as supply grew in the U.S., even with a strong U.S. dollar relative to the Canadian dollar, that U.S. buyers would stay home a little more because they had more cars to choose from stateside,” Kontos said. “But as that Canadian dollar has weakened, it maybe prevents or delays that trend further.”

Prices have also remained elevated because the long financing and lease terms available to more Canadian buyers earlier this decade have prevented those vehicles from re-entering the market quicker than they otherwise would have.

 

SUPPLY-DEMAND MISMATCH

“Canada’s cycling-out of sales is longer” than it is in the U.S., Kontos said.

Another factor keeping prices high continues to be the mix of vehicles returning to the market. Simply put, there are not enough crossovers, SUVs and pickups entering the used market to match sky-high demand for those vehicles. The market’s mix is similar to that seen in the new-vehicle market at the beginning of the decade, when the Canadian market’s march toward light trucks accounting for 70 per cent of new-vehicle sales was only just beginning.

As a result, a lack of supply for light trucks has kept prices for crossovers, SUVs and pickups generally high, while weaker car demand has pushed the values of many used-car segments downward.

Kontos said a similar trend was seen in the United States in the years following the recession, though more trucks are returning to the U.S. used-vehicle market and bringing prices closer to parity.

“In Canada, that’s yet to really happen because the growth in trucks and the supply growth in general hasn’t been of that magnitude or duration.

But the same thing should happen over time,” he said.

 

 

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