If you are shopping for a new ride, or even a used one, be warned: prices are surging, choices are limited, dealer lots are bare, and consumer-friendly conditions won’t improve for months and months, if not years.
How bad is it out there for buyers?
The average transaction price of a new vehicle in Canada has surged from $37,000 a year ago to $42,000 today, according the research from J.D. Power & Associates. The average new car loan payment has hit $700 a month. More than half of buyers who opt for a loan, are stretching out payments to 84 months. That’s SEVEN YEARS to pay off a car. Crazy.
A year ago, when the COVID crisis was spinning out of control in a world of uncertainty and without vaccines, dealers needed 70 days to move a new ride off the lot. Now it’s 45. Buyers are happy to snap up whatever is available and pay through the nose for the privilege.
At the root of all this is the microchip crisis. As Scotiabank notes in a recent research note, the global semiconductor shortage is “adversely affecting a large variety of industries,” not least of them the car business, “and “bottlenecks will take time to unwind.”
Semiconductors, or integrated circuits, are the brains in our electronic devices and systems. The “chips” run everything from cars to quantum computing. The auto industry as a whole is one of the very largest consumers of chips and it simply can’t get enough of them. Demand for chips in networking, communications, data processing and consumer electronics is staggering.
The car business is competing with all these growing economic sectors for a limited and slowly expanding supply of chips from a manufacturing base that, as Scotiabank notes, is struggling to meet surging demand – up 20% year-on-year in 2020 alone. Chip producers are running at maximum capacity, notes Scotiabank.
“Due to the long and complex manufacturing process” associated with chip production, cautions Scotiabank, “ramping up capacity is not a quick solution but a multi-year process.” Do not expect a quick fix to this crisis.
I won’t get into the weeks of chip production, but suffice to say geopolitics, climate change, and the economic uncertainty and unpredictability caused by the global pandemic all are at the heart of the semiconductor shortage. The U.S., China and Europe consume about 70% of global chip production, and all three regions are in a fierce competition for technology supremacy. This will not subside, though China appears poised to soak up more than its share of future chip production.
The auto industry here in 2021, global in nature and cautious because of the enormous investments required to design, build and deliver new vehicles, put itself in a tough spot based on what at the time appeared to be sensible decisions made during the worst months of the pandemic last year – when automakers cut chip orders by 30%, worried about the economic impact of COVID-19.
They did not expect governments to turn on the spending taps and central banks to unleash a firehose of free money to keep economies around the world afloat. So just as automakers were readying for slumping consumer demand, the opposite happened. Consumers flush with cash – after lockups and thanks to government assistance – went looking for new rides.
And they’re still on the hunt. Consumers in Canada and elsewhere are sitting on a huge, unprecedented pile of cash. Those who want a new vehicle have the money to pay hefty prices for the limited number of new vehicles available.
To put this in perspective, consider just how much Canadian consumers have to spend or invest. Royal Bank CEO Dave McKay notes that Canadian consumers are holding $500 billion in cash and excess business deposits right now, versus the typical $40 billion held in cash accounts in more normal times. That money, says McKay in a Globe and Mail report, is “just sitting there waiting to be spent, unable to be spent. That’s 25 per cent of Canadian GDP.”
In the car business as elsewhere, a lot of money is chasing a lack of supply. That means prices will remain high or even rise as demand persists. Yes, inflation.
So, when will we see more attractive conditions for car consumers? Scotiabank believes a balanced market where production and demand are in sync might appear in 2023 – if “auto production starts normalizing in the fourth quarter of this year.” That’s a big “if.”
For now, “substantial pent-up demand is growing” with unmet demand for new cars and light trucks in North America reaching 2.0 million units by the end of this year – and 10 million globally. New auto demand, says Scotiabank, may very well reach levels even higher in 2022 than pre-pandemic levels which were already elevated.
For today’s car shopper, the lack of choice on dealer lots is forcing a total re-think.
“With dealer lots cherry-picked and sparse, many car buyers have been forced to reconsider their choices and kick the tires of overlooked models and brands,” reports The New York Times.
There’s no relief in the used car market, either. Scotiabank notes that according to Black Book, used car prices are up an average of 25% in the U.S. this year, and it’s a similar story in Canada.
If you can wait, if you can hold off on a new or used car purchase, that would be the best advice for the economically savvy car buyer. It might even make sense to spend $1,000 or $2,000 to keep that old ride running for another year or two, in anticipation of a normalization in supply and demand, and the resulting normalization of pricing.
But if you must replace your old clunker, one option is to cast a wider net, as The Times notes. If that Ford F-150 or Ram pickup is unavailable or over-priced, perhaps a Nissan Titan will do?
If you are flexible about brands, models, paint colours, equipment levels, packaging and such, you will likely find something that will meet your needs somewhere on a dealer lot, and at something resembling a reasonable price.
Just remember: it’s a seller’s market in today’s car game, and it will likely remain so for at least another year to 18 months.