It’s been said that one of the most important purchases a person will make in their life – second only to buying a home – is a car. And though the reasons that go into it vary, the one common denominator among Canadian consumers is price, specifically affordability.
A report published last year by AutoTrader – Canada’s largest online automotive marketplace for new and used vehicles – in conjunction with Angus Reid Group, surveyed more than 1,000 Canadians who had purchased a car in the last two years or intend to buy one in the next two years. The purpose of the study was to gain a better understanding of the perceptions and priorities of consumers throughout the car buying process.
One thing it found was that 77 per cent of respondents listed price as an important factor in their decision. It’s a notion that goes back to a person’s first car purchase.
“In Canada, your first vehicle purchase probably has a lot to do with price, more than anything else, depending on age and income,” said JD Ney, director of the automotive practice at J.D. Power Canada, a market research firm that surveys people on their car purchases and ownership experiences.
“You see a lot of first-time car buyers purchasing used vehicles.”
Ney said used vehicles have an inflated value in the current marketplace because of the global semiconductor shortage, which has limited the manufacturing of new cars.
Vito De Filippis, a vice-president of account management with Environics Analytics Research Group, which works with several auto manufacturers, said the current climate of limited new and used vehicles has changed the consumer mentality toward purchasing cars.
“If there is something available, they buy it,” De Filippis said. “That’s kind of been the story for the last few months. That’s the big challenge we have with a lot of our clients. We help them with marketing, but the truth is what they’ll tell us time and time again is marketing is great in normal times, but today it’s, ‘Do I even have the car? Or do I have to make them wait a year to buy it?’”
Robert Stein, president of Plaza Auto Group, which owns eight locations in Ontario, said that affordability for consumers changes after that first car purchase when they are earning a greater annual income.
“A lot of them will buy what they can afford at the beginning and then they buy a logo after that – a BMW, a Mercedes-Benz. It’s a sign of success,” he said.
Leasing versus buying
Ney said financing and leasing represent the “lion’s share” of purchasing, and that only an extremely small portion of consumers come into a dealership and buy their vehicles outright. Stein said generally only about five to eight per cent of consumers will do so.
“I think it’s more based on the brand,” Stein said. “A Hyundai is a high percentage of leasing, and Subaru is a high percentage of leasing and a very high percentage of cash buyers.”
Ney said for the consumer the first new vehicle purchase often has a lot to do with monthly payment and price point. “I don’t think many Canadians view their vehicle (costing an average price of) $40,000,” he said. “They really just view it as being $500 a month.” He said long-term financing “keeps the monthly payment in a zone where people are more comfortable.”
Financing vehicles has been around in Canada for a long time, but what has changed is the term, said Ney. Prior to the tail end of the recession in 2008 and 2009, the average finance term for a new vehicle was 48 months, maybe 60 months. After that, Ney said, there was an “absolute explosion” in the percentage of Canadians financing their cars over a period of 84 to 96 months, something no one in the industry had seen before.
Stein said the trend to long-term financing happened when many manufacturers stopped leasing because of a financial crisis between 2009 and 2011 that rocked the industry.
“I believe it changed to 72- and 84-month financing to compensate for the lack of leasing and to lower the payments for customers,” he said.
Some people prefer having the car financed because they want to own it outright after the end of the payments, Stein said, while others prefer leasing because they want a new car every four years.
Ney said that over the last few years, Canadians have shifted from the traditional small-sedan segment and into the sport utility vehicle (SUV) and crossover utility vehicle (CUV).
“Those are more expensive vehicles, and in order to keep the monthly payment around the same spot or something more palatable, the option to extend that financial term has proven to be convincing,” Ney said.
John Shmuel, director of content and strategy at Ratesdotca, Canada’s largest digital platform for insurance and money, said when individuals are seeking insurance on their newly purchased vehicle the broker wants to know if the customer is financing the vehicle, leasing it or buying it outright.
“We see that financing is overwhelmingly the most popular option that people go for,” he said. “The very long financing model is absolutely becoming more popular.”
He said when you factor in regional and demographic data, it lines up with affordability.
“In Ontario, the Honda Civic and the Toyota Corolla are the most-quoted cars (for insurance) for all generations,” Shmuel said. “Once you get into the older generations (60 and over), you start to see more (expensive) cars quoted because they have a larger budget. But if you go to Alberta, across the board, except for the very youngest generation – Gen Z – you see a preference for larger vehicles and pickup trucks. The Ford F-150 is almost unanimously the most popular vehicle across that segment and we don’t see a Honda Civic in the top five, but we do see the Honda CR-V and SUV.”
Paying full sticker price – even for used
As mentioned by said JD Ney, director of the automotive practice at J.D. Power Canada, a lot of first-time buyers purchase used vehicles. With new vehicles in short supply because of a global semiconductor shortage, there’s a premium on used vehicles – and it is driving up the value.
Canadian Black Book, which values new and used vehicles, said the price of used vehicles has increased for 20 straight weeks because of declining inventory. “For first-time car buyers, the buying experience has changed, gone (for now) are the days of negotiating with the salesperson,” said James Hancock, director of OEM strategy and analytics at Canadian Black Book. “As the new car supply shortages continues, buyers must be willing to accept that some options may not be available, and they must be willing to pay full sticker price for a vehicle that they will have to wait one to four months for delivery.”
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