Looking for a used car? What you should know about the booming market

 

Click to play video: 'Why used cars are actually increasing in value' Why used cars are actually increasing in value

Why used cars are actually increasing in value
The average price of a used car in Canada has jumped nearly 50 per cent since last year. 

Erika Weber had a modest vision for her first car: a small, reliable model that can handle rugged country roads. But she described her months-long journey to find it as disheartening, disappointing and full of dead ends.

Weber, a project manager, admits she knows little about cars. So she enlisted the help of a consultant to help her navigate the sticker shock and dwindling options — dual fallouts of the COVID-19 pandemic. With a $12,000 budget, it was a struggle. They recently went to see a used car in Ontario, but they bounced right after they saw it.

“We were promised a car that hadn’t been through any accidents, was in good condition,” Weber said.

“We showed up before the private seller got there and realized that the car had clearly flipped, and the front of the car had not been put back on properly.”

Erika Weber, 33, pictured in March 2022 near her Toronto apartment, spent months looking for her first car. Jasmine Pazzano/Global News

Like other millennials, the 33-year-old from Toronto said she has been wanting throughout the pandemic to move out of the big city and into a rural setting, hoping to be closer to nature. She sees a car as the first step in making this become a reality, but for Weber and many other North Americans, finding an affordable and quality set of used wheels right now is difficult — and industry experts say the market will be inflated for months, at least.

Advertisement

The pandemic boosted demand for cars, and at the same time, it helped spur a vehicle shortage by setting off a domino effect of supply-chain issues. The combination of these situations pushed the industry to boom like never before, leaving many car sellers just as desperate as buyers. Both have been forced to adapt to an evolving industry going through more changes than ever.

This means many long-standing rules about the used-car market no longer apply. Remember the old adage that the moment you drive your new car off the dealer’s lot, the vehicle loses 15 to 20 per cent of its value? 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. Dealers told Global News this includes the Canadian bestseller Honda Civic, and used Toyota RAV4 Primes are listed at thousands of dollars more than new ones.

“It’s a classic economic supply-demand equation,” said Rebekah Young, a Scotiabank auto economist. “In the last half century, we’ve never had such an imbalance.”

Dealers growing more desperate

With almost 40 years of experience in the auto industry, Mark McMullen said this is the first time he’s seen the intense tug of war happening between dealers over single vehicles. And he said the situation is getting worse.

“As a car guy, it’s hard to stomach what’s going on right now,” said McMullen, the general manager of Mark Wilson’s Better Used Cars in Guelph, Ont.

He has countless stories of dealers, including himself, who are clamouring for inventory — most notably, the tale of the 2019 Ram 2500 on his lot. After he sold it to a client for $41,900, McMullen bought it back months later for $2,000 more, despite the client adding 80,000 kilometres to the odometer.

The interest in the 2019 Ram didn’t end there. Another Ontario dealer approached McMullen and begged him for the truck. Initially, McMullen told him no, but he changed his mind after the dealer made an offer he couldn’t refuse: $50,000.

“This is historical. This has never happened,” said McMullen, who manages a business that dates back to 1961. “Never could you buy a vehicle and drive it, and it actually appreciates.”

Mark McMullen leans next to a truck in his lot in March 2022 at the dealership he manages, Mark Wilson’s Better Used Cars in Guelph, Ont. Jasmine Pazzano/Global News

How did we get here?

Simply put, the COVID-19 pandemic drove consumers to cars. More people started seeing a vehicle as a solution to new problems, including fears of ride-sharing and public transit, and many people in urban centres who migrated to suburbs saw owning a vehicle as a necessity, Scotiabank’s Young said. Lockdowns also 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.

Consumers have been ready and willing to buy vehicles, but the empty car lots throughout North America show just how little stock there is. The global microchip shortage and other supply-chain issues stunted car production, fuelling the need for vehicles. According to Scotiabank, at least two million North American consumers have likely been in the market to buy a new car since the beginning of the pandemic but can’t buy one.

“Even if auto manufacturers operate at full speed, operate at three shifts per day, seven days a week and don’t have downtimes, they still won’t be able to fully make up for that lost demand or that pent-up demand over the course of 2022,” Young said.

This shortage has turned so many people to the used market that prices for these 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 per cent increase over a year’s time, according to the Canadian Black Book. Young said lower-income Canadians who need a vehicle are feeling it.

Data from the Canadian Black Book on used car listing prices nationally. Chart designed by James Hawkins/Global News

“Many Canadians will be priced out of used-vehicle markets.”

Shape Created with Sketch.

Advertisement

Another reason prices are going up: the lifecycle of used cars has been interrupted. Young said part of this is because of longer leases. She said typically, when a lease is up, that vehicle would enter the secondhand market. But without a new vehicle to put someone into, dealers have been extending their clients’ leases.

Read more: Leasing a vehicle? Consider your options before handing back the keys

Rental companies have traditionally been one the biggest sources of used-vehicle stock, but Young said this industry was decimated early on in the pandemic and rental businesses liquidated their fleets.

When things picked up again and rental companies went to buy new vehicles, she said the stock just wasn’t there, so they’re keeping their cars instead of selling them off and into the used-vehicle supply as they once did.

“If you try to rent a car right now, it’s more expensive now than it ever was,” Young said. “Demand for all vehicles is strong.”

The ways we buy and sell cars are changing

In the face of the unprecedented shortage, decades-old dealerships – including McMullen’s – needed to pivot to keep a steady flow of customers and cars. He had to close the doors to the physical dealership during the first Ontario lockdown, and soon after, supply issues slashed his stock in half. He said his team was panicking.

This, he said, “forced their hand” in reinventing their sales model. They started offering online sales and ramped up delivering cars to people’s homes.

“During the pandemic, necessity is the mother of invention.”

Shape Created with Sketch.

On a larger scale, traditional dealerships are adapting by consolidating. Last August, North American auto dealership group AutoCanada acquired McMullen’s dealership, one of dozens nationally that it operates, including what had been another independent Ontario business, Halidmand Motors.

Click to play video: 'Toyota dealer insisted on buying options or no deal: customer' Toyota dealer insisted on buying options or no deal: customer

Toyota dealer insisted on buying options or no deal: customer – Nov 30, 2021

Although AutoCanada declined to give Global News an interview, McMullen said the group has been working on an online retail platform and looked to local dealers, including him, to build inventory and get intel on how used-car operations work.

“For us as dealers … it’s kind of like the Walmart thing — you either join them or you’re in trouble,” McMullen said.

Baris Akyurek, the director of marketing intelligence at cars marketplace AutoTrader.ca, said “the transformation that dealers have gone through over the past two years has been amazing.”

Read more: Ongoing shortage of new and used vehicles drives prices up and options down

But going online is hardly novel. To stay competitive, McMullen mirrored digital platforms like AutoTrader (which itself began as a print magazine in 1975 and went fully digital in 2012) and emerging industry disruptor Clutch, which has been based entirely online since it was founded in Halifax in 2016.

Consumers can browse Clutch’s inventory on its website and buy a car from home and the company will deliver the car right to the customer’s doorstep.

Its CEO, Dan Park, is the former head of Uber Eats Canada. He likens the Clutch experience to ordering a pizza online and said it’s an alternative to the traditional way of buying a car through dealerships.

And yet, Park shared the same concerns as McMullen at the beginning of the pandemic.

“Sales evaporated to zero as the world figured itself out,” Park said.

Relatively new to the company, Park remembers being “on the ground in the fetal position, wondering if this business would exist.”

AutoTrader.ca, a platform on which Clutch advertises, also saw a dip in customer traffic in spring 2020.

“When there are restrictions and lockdowns, we see a negative correlation in sales,” said Akyurek.

Read more: Several pandemic-driven trends affecting vehicle shopping in Canada, AutoTrader study finds

But soon after the initial shock of the pandemic, people moved online to find cars, which makes sense when you factor in that one in five Canadians have recently been working from home all the time.

Advertisement

“Not only have dealers been adaptable,” said Akyurek, “consumers have shown they are adaptable because we need to. We all need to.”

Park said Canadians were “late to the party” when it comes to e-commerce for cars. Clutch follows the tracks of similar industry disruptors, including Carvana and Vroom in the U.S. and Kavak in Mexico.

Canadian car vendor Clutch’s CEO Dan Park stands in the Toronto production warehouse, where staff fix up used cars before the company sells them. Brent Rose/Global News

Park said Canadians were “late to the party” when it comes to e-commerce for cars. Clutch follows the tracks of similar industry disruptors, including Carvana and Vroom in the U.S. and Kavak in Mexico.

Vehicles in general have been one of the last goods and services to migrate online. In Park’s view, that’s partly because of the complexity surrounding cars as well as the “lack of trust around an industry that … historically has not provided the best consumer experience for folks.”

He said his company provides relief to consumers who are tired of running the gauntlet of meetings with multiple dealers to find cars they want.

“On a Saturday, you spend four or five hours driving around in the suburbs somewhere visiting dealerships. If you’ve got kids, you’re lugging your kids with you. That takes an entire day, which obviously is painful, so we’re trying to remove all that pain and frustration.”

With Clutch, not only do its customers never have to leave the house to find a car, but instead of test-driving the car around the dealership, people can try driving the car in their own neighbourhoods as soon as it’s delivered.

“It was a little weird, but honestly … it’s so convenient,” Hamilton resident Haley Reap said during a test drive of a car they ordered from Clutch. “I could just come home from work and know that my car was arriving later that day.”

A Clutch truck pulls up in front of Hamilton customer Haley Reap to deliver the car they ordered on the Canadian company’s website. Brent Rose/Global News

Park said he has been witnessing major growth at Clutch since he started working there in 2019. The Toronto-based company went from selling hundreds of cars pre-pandemic to thousands now, and it has warehouses in Vancouver, Calgary, Saskatoon, Ontario and Halifax. The company recently signed a deal with the NHL to become the league’s official used-car retailer. And, Park told Global News, Clutch hopes to offer its services to 90 per cent of Canadians by the end of 2023 – a considerable goal given the vast expanse of the country.

“There are lot of competitors out there,” Park said of the auto industry. “But at the end of the day, competition is good for the consumer. Consumers having more choices is a good thing. And if anything, this just raises the bar for everyone.”

What can consumers expect now?

Even as the industry continues to evolve and new dealers emerge, hurdles remain – namely, low inventory and high prices.

Scotiabank analyst Rebekah Young said 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.”

“Prices likely won’t decrease in the next couple of years.”

Shape Created with Sketch.

But there is a positive forecast for vendors like Park and McMullen. “Auto sales will continue to be strong, at least through the course of 2023,” she said.

Plus, astronomical inflation of gas prices seems to be no deterrent.

McMullen is preparing for this continued demand, which includes keeping a steady flow of inventory that he finds at online auctions. Although his stock is back to pre-pandemic levels, he said his dealership is selling fewer cars and paying more — 40 per cent year over year — for cars.

“Normally, you buy low and sell high,” said McMullen. “We’re buying high to keep cars here for our customers.”

Advertisement

He said his business is not losing money right now, but he is preparing for when new-car supply eventually starts to replenish.

“We need to keep an eye on the fact that we might get stuck with these cars or lose money on these cars.”

Read more: Canada’s auto makers say 2022 budget not enough for electric vehicle target sales

Another leg of his rejigged plan is sticking with the online-and-delivery model he ramped up in 2020. Even as the Ontario economy has reopened (and closed), McMullen said roughly 10 per cent of his dealership’s customers now take advantage of the home-delivery option, compared with two per cent before the pandemic started.

Nonetheless, he said customers still crave the in-person experience.

“This place becomes like a flea market on a Saturday.”

Recent Deloitte data reflects this. Only two per cent or so of consumers want a fully virtual experience when buying their next car.

“I don’t think anybody needs to be worried,” McMullen said. “The two platforms between online and bricks and mortar can coexist.”

Erika Weber’s journey is a testament to that. She found her car online — a 2011 Hyundai Elantra Touring GLS — and travelled from Toronto to a dealership in Ottawa to pick it up.

Is it her dream car? Not exactly. Although she ended up paying a little more than half of her original budget — $6,500 — she said it had a few more “surprises” than she expected when she saw it in person. But she took it all in stride.

“At the end of the day, I can’t have exactly what I want,” Weber acknowledged. “And so this was me being flexible in going with this one. It didn’t feel like I was settling for something. It’s a beater. It’s going to give me what I want it to give me for adventures.”

It’s also given her a sense of freedom, and joy.

“I’m still digesting the fact that I still have a car that I can just get in and go. The first time it was like, ‘I’m just driving a car’ like I would with a rental car. And then it was like coming out of my house and being like, ‘Oh, the car’s still there. And no one else is going to be driving it!’ It is completely and totally mine. And it was really exciting to realize that.”

See this and other original stories about our world on The New Reality airing Saturday nights on Global TV, and online.

View original article here Source