Advertisement
Canada markets closed
  • S&P/TSX

    21,837.18
    -11.97 (-0.05%)
     
  • S&P 500

    5,149.42
    +32.33 (+0.63%)
     
  • DOW

    38,790.43
    +75.66 (+0.20%)
     
  • CAD/USD

    0.7385
    -0.0003 (-0.05%)
     
  • CRUDE OIL

    82.56
    -0.16 (-0.19%)
     
  • Bitcoin CAD

    89,146.57
    -2,826.68 (-3.07%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • GOLD FUTURES

    2,164.70
    +0.40 (+0.02%)
     
  • RUSSELL 2000

    2,024.74
    -14.59 (-0.72%)
     
  • 10-Yr Bond

    4.3400
    +0.0360 (+0.84%)
     
  • NASDAQ futures

    18,188.00
    -43.50 (-0.24%)
     
  • VOLATILITY

    14.33
    -0.08 (-0.56%)
     
  • FTSE

    7,722.55
    -4.87 (-0.06%)
     
  • NIKKEI 225

    39,596.29
    -144.15 (-0.36%)
     
  • CAD/EUR

    0.6789
    -0.0003 (-0.04%)
     

Sales of luxury cars hit record levels - while Canadians go deeper into debt

Sales of luxury cars hit record levels - while Canadians go deeper into debt

Canadians sure love their cars: as our debt load increases, car loans are partly to blame. And we’re not just talking reliable minivans or practical sedans that Canadians are steering: Sales of luxury vehicles hit a record last year.

Consumer debt rose by nearly seven percent this year over last to $1.544 trillion, according to Equifax Canada’s Q3 2014 National Consumer Credit Trends Report. On a debt classification basis, the car-loan sector went up by 4.2 percent.

Car sales are expected to climb this year for the sixth year in a row, according to BMO Financial Group.

More than 187,700 cars luxury cars were sold in Canada last year, for the first time accounting for over 10 percent of the overall Canadian market, research by DesRosiers Automotive Consultants found. Porsche sales led the pack, with sales increasing by 34 percent from 2013 to 2014. Land Rover sales were up 22 percent, Audi’s by 19.5 percent, Jaguar’s by 16 percent, Cadillac’s by 12 percent, and Lexus’s by 10 percent.

ADVERTISEMENT

So what’s driving our need for wheels?

“There was a bit of a pent-up demand after the recession we had a few years back and following that time frame the car-loan and -leasing market has been booming,” says Regina Malina, senior director of decision insights at Equifax Canada. “There are also a lot of financial products in the marketplace that allow consumers to be able to afford cars, which in many cases they need to get to work. Terms of car loans have increased significantly in the last couple of years, from three years to potentially six or seven years. Interest rates are very low. Financial circumstances are allowing both lenders and consumers to make it work quite successfully.”

Malina uses the term “successfully” because delinquency rates for car loans are extremely low, “one of the lowest among all the [loan] products” out there, at 1.12 percent.

When it to comes to luxury cars, it's obvious some people want to leave the Joneses in the dust.

“With home valuations growing, especially in Vancouver and Toronto, the two main spots where most luxury dealers are located, you get people who start to moving to million dollar home and feel they need a more expensive car to go with it,” Koustas says. “It points to the rise in Canadian equity and might tilt the need in terms of [people] upgrading their vehicle choice.”

Another factor explaining escalating car sales in Canada is simply good product and good pricing.

“Cars are actually much more affordable than they were in the past,” says BMO Nesbitt Burns economist Alex Koustas. “If you look at any measure, whether it’s financing costs to the sticker price, cars are just more affordable right now than they were even in 2007. If you look at features that are offered, they’re far superior than they were before and if you look at pricing, it’s just an attractive product.”

Automotive journalist Zack Spencer, founder of the car-review and -information site MotorMouth.ca, says that buying new is more achievable for many Canadians than buying used.

“A lot of people want to buy used because of the deprecation, and there’s something to be said for that,” Spencer says. “But we live in a time where cars are expensive, and to buy a car and own it outright is not the reality for most people. Most people are payment-based.

“Auto manufacturers are providing all kinds of incentives and cheap financing, so the cost to buy a car and finance it are very, very low,” he adds. “Many have zero percent interest or very low finances: 1.9 or 2.9 per cent. If you go to bank and get a car loan to buy a three-year-old Honda civic, they’re not going to charge you 0 percent interest or 2.9 per cent, so your carrying costs on that money are much more expensive than buying that new car.” 

There is risk involved in all this car-buying, though. Research by J.D. Power and Associates, a global market research firm, shows that the average monthly loan payment for a new car is about $550, while the average lease payment is roughly $490. High household debt-to-income levels could leave borrowers vulnerable to an economic downturn.

“As we were reminded with oil patch situation, when we look at current economic environment where debt is increasing, what if something changes in the environment?” Malina asks. “What if the interest rate goes up or what if something like oil patch happens in a more extended manner for a longer period of time? What if there’s an increase in unemployment? Those types of changes would immediately change the landscape.”

Banks could suffer too. Three big Canadian banks -- Toronto-Dominion Bank, Royal Bank of Canada, and Bank of Nova Scotia -- have identified auto lending as a high growth product within their retail platform. Auto lending by banks has grown at a compounded annual rate of 20 percent since 2007, “significantly outpacing” the growth of mortgages, credit cards, and lines of credit, according to a 2014 report by Moody’s Investors Service. Authors Jason Mercer and David Beattie warned that with household debt already at record levels, the shift into car lending has exposes Canadian banks to the possibility of soured loans and lower recovery rates in a downturn.