Used cars are for sale at Queen Compact Car Sales and Service in Toronto’s Beach neighbourhood on Jan. 3.Fred Lum/The Globe and Mail
Used-car prices are falling after hitting record highs earlier in the pandemic. The trend provides welcome relief for car buyers looking for affordable options, but it could be a headache for some existing vehicle owners who bought at peak prices with large auto loans.
The average listing price of a used passenger vehicle was hovering around $37,000 at the end of September, roughly in line with prices seen in 2020, according to data from Canadian Black Book (CBB), an automotive analytics company. That’s down around 14 per cent from an average price of about $43,400 in 2022.
The risk for some consumers is that they’ll find themselves with big auto-loan balances for vehicles worth a lot less than they paid for them.
“If you bought a car at a very high price, if you come to sell it down the line, obviously the residual value won’t be there,” said Rebecca Oakes, vice-president of advanced analytics at Equifax Canada.
Used-car prices soared in the earlier phase of the pandemic as supply chain logjams created a shortage of new vehicles and pushed up their prices.
The dearth of new cars and trucks then led both consumers and rental companies to hold onto their existing vehicles for longer, reducing the availability of used vehicles just as more buyers had turned to the preowned market for more affordable options. The mismatch between supply and demand, in turn, sent used-car prices surging as well.
Now, though, consumers are pushing back against big prices for used vehicles amid higher interest rates and more choice of new cars and trucks, said Daniel Ross, senior manager of industry insights and residual value strategy at CBB.
Rapidly falling used-vehicle prices could push up auto-loan delinquencies if they lead consumers to choose to default rather than keep paying off their big loans for vehicles worth little compared with outstanding balances, Ms. Oakes said.
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It’s a phenomenon that was “certainly happening” prepandemic, with some over-leveraged consumers surrendering their vehicles, she added.
Usually, consumers end up with loan balances much larger than the value of their vehicles when they trade in their vehicles before they’ve fully paid them off. Dealers then typically add the amount owing on the old car to the loan on the new vehicle.
But those who borrowed heavily to buy cars or trucks early in the pandemic could find themselves in a similar situation if used cars begin to depreciate quickly.
Severe delinquencies for auto loans, in which consumers have missed payments for 90 days or more, have already bounced back to 2019 levels and are expected to continue to rise as Canadians struggle with soaring living costs and expensive borrowing, Ms. Oakes said.
The data also show that some borrowers are falling behind on their auto loans after their mortgages renew at a higher rate, a trend Ms. Oakes expects will continue in 2024 and 2025.
Rapidly dropping used-car prices could be an additional challenge for both borrowers and lenders, she said.
Mr. Ross, however, doesn’t see used-car values plunging. In fact, he expects preowned vehicles to continue to retain their value better than before the pandemic.
In 2022, the average four-year-old vehicle in Canada had a retention value of 66 per cent of its manufacturer’s suggested retail price, CBB data show. That was far above the 42-per-cent to 43-per-cent retention value typical of prepandemic years.
Mr. Ross sees retention values coming down over the next few years but gradually. As of 2027, for example, he projects average retention values of 48 per cent – still higher than before the pandemic.
While high borrowing costs, improving new-vehicle inventories and weakening consumer demand, among other factors, are weighing on retention values, other trends are working in the opposite direction, according to Mr. Ross.
The main one is the lingering effect of the new-car shortage on the preowned market, he said.
Canadians typically trade in their new cars, or reach the end of their car leases, after four years, injecting new supply into the preowned market, Mr. Ross explains. But low new-vehicle sales in 2020, 2021 and 2022 mean fewer cars, trucks and SUVs will turn up in the used market for the next several years.
“We haven’t really started seeing the repercussions of that yet,” he said.
For Canadians who borrowed heavily to buy used vehicles at exceptionally high prices, that may be a saving grace.
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