Having trouble finding an affordable new or used car? You’re not the only one. Over the last two years, securing a used vehicle has proved problematic for drivers, who are facing stiff competition and steep prices on the secondary market. The ongoing vehicle supply shortage in Ontario continues to cause a lot of roadblocks for buyers, including fewer options, long waits and higher prices. In this article, we examine the car industry predicament, the causes behind the shortage and when we may feel some relief.
Times are changing
The old adage of the moment you drive your new car off the dealer’s lot, the vehicle loses 15% to 20% of its value no longer holds true. Shrunken supply has inflated prices to the point that some used models are now worth so much, they’re selling for more than their new counterparts. The average price of a new car also jumped by 12.7% to $50,758. Meanwhile, the average price of a used car in Canada has jumped nearly 50% since last year.
Reasons for the vehicle supply shortage
Supply chain experts contend that the new vehicle supply shortages began at the start of the pandemic, when demand was forecast to dwindle significantly. Automakers cut production and in turn, so did other manufacturers that supply them with parts. At the same time, the pandemic boosted demand for cars. The domino effect of supply-chain issues pushed the industry to boom like never before, leaving many car sellers just as desperate as buyers.
Let’s look a little more closely at the various factors contributing to the vehicle supply shortage:
In a nutshell, the COVID-19 lockdowns drove consumers to cars. Vehicles became the solution to the new problems created by the pandemic; namely social-distancing. They also combatted the fear of ride-sharing and public transit. Many of us felt the draw of less urban centres where case numbers were lower. Migrating to the suburbs made car ownership a necessity for previous urban dwellers.
Increase in savings
With the lockdowns, many of us were able to save more money by eliminating many expenses. Travel was non-existent, and commuting was mostly eliminated as we were forced to work from home. As a result, this allowed many Canadians to bank more money. On average, as of mid-2021, Canadians saved an extra $8,300 since the beginning of the pandemic.
Supply chain issues
Rental companies have traditionally been one the biggest sources of used-vehicle stock, but this industry was devastated early on in the pandemic and rental businesses liquidated their fleets. When things picked up again, rental companies went to buy new vehicles. However, the stock just wasn’t available, thereby forcing rental companies to keep their cars instead of selling them. With fewer new cars hitting the dealers, the secondary market is being affected, as there are fewer trade-ins.
Used car prices began to increase in October of 2020, when the new car supply was initially affected by the semiconductor shortage. The global microchip shortage stunted car production, fuelling the need for vehicles. Pricing really began to soar in the fall of 2021.
Used car upsurge
The stunted new production has turned so many of us to the used market. Because of this, prices for these used vehicles have hit historic highs. The average price of a used car in Canada is more than $35,000 and rising – a whopping nearly 50% increase over a year’s time, according to the Canadian Black Book. The lack of production of newer vehicles is forcing many dealerships to solicit for used vehicles. In light of this, many car owners are deciding to make a better profit by selling it themselves privately instead of back to the dealership. As a result, this causes the decline in vehicles available on lots. This means when the dealers are paying higher prices to bring these used cars onto their lots, we, in turn, are paying higher prices.
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According to Rebekah Young, a Scotiabank auto economist, another contributing factor to the shortages in new and used vehicles is the lease lifecycle. Because of longer leases, cars are no longer entering the secondhand market. Without new vehicles to put their customers into, dealerships have been extending their client’s leases.
The current shortage situation has led to fierce competition. “There’s multiple dealers trying to buy the same vehicles, so prices have skyrocketed. You kind of have to stay competitive and try to offer as much as you can and that’s jacking up the prices,” said Rob Fekhon, Sales Manager at Anew Auto Sales in Cambridge. The ferocity of the competition is echoed all over Ontario. “This is historical. This has never happened,” said Mark McMullen, the General Manager of Mark Wilson’s Better Used Cars in Guelph. “Never could you buy a vehicle and drive it, and it actually appreciates.”
Supply shipped south of the border
The chip shortage affecting new car manufacturing and the extended leases have had a trickle-down effect on supply and demand. A big flow of used cars has found its way to the U.S. Americans are scrambling to get cars, too. Andrew King, managing partner of DesRosiers Automotive Consultants, sees the U.S. exchange rate as the draw. “With the Canadian dollar being low the last few years, there’s been big volumes going to the U.S. – around 300,000 units a year. They (Americans) can literally pay full retail prices on our product and sell it there and still make money.”
No foreseeable end in sight
The ways we buy and sell cars are changing. High prices are not simply a money grab for merchants. Dealerships are having a difficult time finding inventory, and when they do, there is intense competition on the wholesale marketplace. As a result, the price of the few available used vehicles are almost, if not exactly, on par with the price of a new car, though a lower-end model.
Final thoughts on the vehicle supply shortage
So, where is the light at the end of the vehicle supply shortage tunnel? Scotiabank analyst Rebekah Young believes that “at best, we can hope prices stabilize” after vehicle production catches up with the demand. As for when? “Nobody really knows. The closest I get is that it’s not in 2022.” If you need to look for a vehicle now that pandemic restrictions are lifting and social distancing concerns lessen, be sure to do your homework and talk to one of our isure representatives about insurance rates for both new and used vehicles to find out which is the best choice for you.