More demand, plummeting supply pushing used car prices higher in Canada

TORONTO - Increasing demand and plummeting supply have pushed used car prices in Canada steadily higher since last summer, a trend that is only expected to continue over the coming years, industry players say.

TORONTO - Increasing demand and plummeting supply have pushed used car prices in Canada steadily higher since last summer, a trend that is only expected to continue over the coming years, industry players say.

The business manager of an independent used-car dealership in Oshawa, Ont., said that he was able to buy a "decent," three-or four-year-old van at auction for $6,000 last year. The same van would cost him $7,000 today.

"For us as an independent, it's becoming difficult to purchase quality used vehicles," said William Smith of RER Automobiles.

"It's pretty simple: if there's less to go around, then you end up paying more for the same thing."

Several factors have combined in the last year or so to restrict supply in the used vehicle market, auto industry analyst Dennis DesRosiers said.

Fleet sales - which are primarily made to car rental agencies, but include fleets of vehicles used by businesses and government - began to fall over the last couple years as the rental market softened, said DesRosiers, president of DesRosiers Automotive Consultants.

In the past, a rental agency would get rid of their cars after three or four months, auctioning them off to dealerships who would in turn sell them to the public. Today, rental agencies tend to keep their cars for a year or even longer before auctioning them off, which has slowed down an important supply of used vehicles.

Another key supply of used vehicles virtually disappeared this year when credit markets froze, making it very difficult for consumers to lease new vehicles. Ordinarily, once a lease is up, the car will be auctioned off into the used market in much the same way as fleet vehicles.

DesRosiers cautioned that the full impact of this lack of supply won't be felt for another two or three years.

"We're only at the earliest stages," he said. "It's going to get a lot worse."

A third factor affecting used vehicle prices is demand. Price-conscious and recession-weary buyers, made even more cautious by the struggles of troubled automakers like General Motors and Chrysler, are increasingly turning to used cars rather than new.

According to used-vehicle consulting firm Manheim Consulting, used vehicle sales by dealerships in the U.S. increased by 3.4 per cent in July compared to a year earlier. Meanwhile, ADESA Analytical Services found wholesale used vehicle prices increased by 7.3 per cent in the same time period.

DesRosiers said it's safe to assume the Canadian trends are similar.

He estimated that the supply of off-lease and off-fleet vehicles will drop by 40 to 50 per cent over the next two to three years, pushing the price of newer used vehicles with relatively low mileage up by five to 10 per cent.

All of these factors are forcing consumers to shop around for the best deal they can get.

Dan Simmons, 25, of Pickering, Ont., turned to online classified service Craigslist when he wanted to buy a cheap used car for a cross-country road trip.

He found a 1998 Buick LeSabre with 150,000 kilometres for $1,200 and had purchased it, licensed it and certified it within 24 hours of contacting the seller.

Meanwhile, Meredith McLennan, 26, of Edmonton said she needed to replace her old car after it was rear-ended, but spent some time shopping around first.

McLennan ended up paying $17,000 for a 2007 Mazda3 sport hatchback with 40,000 kilometres at a dealership. She said she's confident she got a good price because of the research she did using online classified sites like Craigslist, Kijiji and Auto Trader.

"I decided to go with a used car because I wanted a car that was relatively new, but affordable," she said.

"I shopped around and looked at some comparables, and I think I got a good deal."

Scott Neil, director of marketing at Auto Trader, said traffic to independent automotive sites like his increased by eight per cent between July 2008 and July 2009.

While Auto Trader sells both new and used cars, he said the majority of the traffic increase has been people looking at used cars.

He said this trend isn't going to change any time soon, with the used vehicle market expected to grow by about 10 per cent between now and 2011.

One other factor affecting the growing popularity of used cars is the fact that the quality of newer cars has improved substantially over the last 10 years or so. In the 1970s, a vehicle tended to last for about 170,000 kilometres. Today, this has increased to 277,000 kilometres and will grow in the next decade to 320,000 kilometres, according to DesRosiers.

"One of the biggest issues with used vehicles historically is that there was a discomfort buying used vehicles because consumers were worrying about buying someone else's problem," DesRosiers said.

"Today, that's much less of an issue, particularly with a vehicle under seven or eight years old."

DesRosiers said that while the average vehicle used to see two or three owners before it was scrapped, today that has increased to four or five.

Because of this, used vehicles will continue to account for a growing percentage of vehicle sales, DesRosiers said - potentially as high as 70 per cent of total Canadian sales by 2013.

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