If you’re like many would-be vehicle shoppers, you may be wondering when prices will finally drop.
For the past two years, the high cost of new and used vehicles has repelled many Canadians who may have otherwise considered trading their vehicle in or buying a new one.
The good news is that the vehicle market seems to be finally stabilizing, which means that the cost of used and new vehicles could drop significantly in the coming months.
Today, I’ll explain why vehicle prices might drop and outline some driving forces behind the current cost of vehicles in Canada.
THE DRIVING FACTORS BEHIND AUTOMOTIVE PRICES
The price of new and used cars, as well as commercial vehicles such as trucks, tractors, and transport vans, can vary significantly, depending on a number of factors and economic conditions.
The majority of vehicles utilize parts that come from all around the world. For example, Japanese manufacturers may source chips from Taiwan, US manufacturers may source suspension components from China, and so on.
The past few years have been marked by global political and economic uncertainty, which has caused significant price increases in everything from building materials to gaming systems and, of course, vehicles.
Some of the driving factors behind automotive prices include:
- Supply and demand: the number of new vehicles available compared to the demand for them
- Supply chain: how easily auto manufacturers can source parts to build vehicles
- Shipping costs: the cost of shipping vehicles overseas can vary based on fuel costs, government tariffs, and hold-ups at international ports
- Inflation: monetary inflation can cause widespread price increases
- Consumer and manufacturer incentives: government programs and tax credits that incentivize consumers to purchase vehicles and manufacturers to build certain types of vehicles
WHY VEHICLE PRICES COULD DROP THIS YEAR
If you’ve been holding off on buying a new or used vehicle, this year could be the time you’ve been waiting for.
The cost of new vehicles skyrocketed due to several supply chain factors, inflation, and a chip shortage. Unfortunately, this drove up the demand (and cost) for used vehicles as well.
Over the past few months, the vehicle market seems to have stabilized, though. In Canada, auto sales in January of this year were up 7.5 per cent compared to January 2022, and 2.3 per cent higher this April than last April, according to Mark Lines’ most recent auto sales volume report.
Although auto prices haven’t exactly dropped off a cliff, the cost of used vehicles dropped 1.9 per cent in February and rose 0.6 per cent in March, according to Statistics Canada. This shows that auto costs could be stabilizing and hopefully could steadily decrease over the coming year.
Here are some of the key reasons why vehicle prices could drop in 2023.
A HEALTHY SUPPLY OF NEW VEHICLES
For the past couple of years, there has been a shortage in the number of new vehicles available. This was especially true for EVs and luxury/sports vehicles. Buyers were often placed on waiting lists to purchase high-end models.
The imbalance in supply and demand for new vehicles caused massive price spikes.
This year, automotive inventories seem to be improving. Total inventory increased in Canada from 2.38 million in November 2022 to 2.57 million vehicles in March 2023, according to Statistics Canada. With reduced consumer competition for new vehicles, costs are finally normalizing, and waiting lists are shortening.
INCREASED SUPPLY OF SEMICONDUCTOR CHIPS
Throughout 2021 and 2022, the shortage of semiconductor chips squeezed the new vehicle market, resulting in higher demand and higher prices. Manufacturers had warehouses full of ready-to-deliver vehicles that lacked the vital chips needed to power onboard computers and electronics, rendering them all but undrivable.
Although there’s still an ongoing chip shortage, analysts at JP Morgan have indicated that supply is increasing, allowing auto manufacturers to potentially increase production worldwide.
REDUCED FUEL COSTS
The global automotive market depends on vehicles and parts being shipped overseas. Ships rely on diesel fuel to power their massive engines. In 2022, crude oil prices spiked from an average of US$68.17 to $94.53 per barrel, a 38.7 per cent increase.
As fuel costs increased, so did international shipping costs, which led to higher automotive costs across the board.
Currently, the average price sits at $73.81 per barrel as of May 23, 2023, a significant decrease from last year. This has made shipping and transportation more affordable for auto manufacturers and dealers alike, who rely on ground freight deliveries.
IS IT A GOOD TIME TO BUY A NEW CAR?
Auto prices are stabilizing, so it could be a good time to shop for a new vehicle. However, you should also remember that interest rates and inflation are still high, which could lead to an unfavorable auto loan.
If you plan on purchasing a new vehicle this year, look into trading in a vehicle with a high trade-in value or making a larger down payment to reduce your financing and interest costs.
Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers on his Wealth Awesome website.