Bank of Canada interest rate hikes have yet to dampen demand for new cars

Successive interest rate hikes by the Bank of Canada (BoC) this spring and summer have begun to push up monthly vehicle payments, but are unlikely to immediately dampen demand in the auto market by lack of supply, according to auto insiders.

While interest rates are rising for all consumers, the impact on the auto market has been limited so far, said Andrew King, managing partner at DesRosiers Automotive Consultants Inc.

“Right now the dominant factor is vehicle supply, and until that’s resolved, all of these demand level issues really don’t come into play.”

Robert Karwel, senior automotive practice manager for JD Power Canada, said key industry metrics point to potential turbulence on the horizon, but show “sustainability” is still embedded in the sector.

“We have no data to suggest anything is being slowed down. Demand is high… Canadians continue to buy, given the number of cars available, this equation has not changed.

CONSUMERS NEED TO ADAPT

Yet, with the BoC’s overnight rate rising from 0.25% in January to 2.5% today, consumers can expect to start feeling the pressure.

Karwel said the average annual percentage rate (APR) for vehicle financing hit 4.5% in July after starting the year at 3.5%. APR growth in 2022 means “the game has changed” from last year, he added. In 2022, vehicle prices rose 12-13%, but monthly payments only increased 2-3% on average, according to JD Power data.

Year-to-date 2022, the average total monthly payment for a vehicle in Canada was around $770, Karwel said. Before the pandemic, it was $660.

So far, Canadians have absorbed those higher payments because high used-vehicle prices have provided a “cushion,” Karwel said. But with higher interest rates accelerating payment growth before vehicle price growth, consumers will have to adapt.

At the dealer level, Mark Falkenberg, head of Ontario’s Willowdale Auto Group, said he expects demand to hold up against higher interest rates, at least in the near term.

“People who need vehicles will continue to buy vehicles. You may have some people who may push it back because rates have gone up, but I think the equity strength of anyone who has an exchange still offsets a lot of that rate increase.

Once the supply of new cars becomes available, however, Falkenberg said automakers will need to reintroduce incentives into the equation, or have their captive finance arms offer more generous rates, to keep buyers going. to enter.

With supply chain issues continuing to drive down production, that scenario looks unlikely to happen before 2023, King said.

“There have been almost a million lost sales in the last three years…Not all of these people are going to buy a car, but some will, and I think those lost sales will definitely give the market strength l ‘next year. “

Once production recovers, King said automakers should be able to sustain demand with incentives, even if rates rise. But further rate hikes, which economists widely expect, pose a threat, he said.

“If the Bank of Canada goes above interest rates, throws the whole economy into recession, [and] people are starting to get laid off, it’s impacting the auto market,” King said.

Karwel, similarly, said rising interest rates and their impact on monthly payments could cool the hot auto market, but there’s no guarantee the sector will find an equilibrium.

“The big thing is it’s like a snowball coming down a hill, you can’t necessarily stop it because we might get too cool.”

If any factor were to trigger this “cascade” in the auto sector today, Karwel said downward pressure on used vehicle prices would likely be the culprit.

“It starts to impact the source of funds on the down payment, and it negatively changes that payment ratio for a consumer.”

Despite the uncertainty, Karwel said another data point gives him confidence that the auto market will be able to withstand slightly higher interest rates.

In the years before the pandemic, he said, you could “set your watch to” what percentage of the total vehicle price consumers were paying in their monthly payment. Between 2015 and 2019, this figure was 1.5%. Yet during the pandemic, he added, that percentage has fallen into the 1.4% range, meaning consumers are paying slightly less for their vehicle with each payment.

“This suggests that payments may increase further, but consumers will be ready to absorb it.”

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