When will car prices drop?

If you’re like many potential vehicle buyers, you might be wondering when prices will finally drop.

Over the past two years, the high cost of new and used vehicles has put off many Canadians who would otherwise have considered trading in their vehicle or buying a new one.

The good news is that the vehicle market finally seems to be stabilizing, which means the cost of new and used vehicles could drop significantly over the next few months.

Today, I’ll explain why vehicle prices may fall and highlight some of the driving forces behind the current cost of vehicles in Canada.

THE DRIVERS OF AUTOMOBILE PRICES

The price of new and used cars, as well as utility vehicles such as trucks, tractors and transport vans, can vary widely, depending on a number of factors and economic conditions.

The majority of vehicles use parts from around the world. For example, Japanese manufacturers can source chips from Taiwan, US manufacturers can source suspension components from China, and so on.

The last few years have been marked by global political and economic uncertainty, which has led to significant price increases in everything from building materials to gaming systems and, of course, vehicles.

Some of the determinants of auto prices include:

• Supply and demand: the number of new vehicles available compared to the demand for them
• Supply chain: the ease with which automakers can source parts to build vehicles
• Shipping costs: the cost of shipping vehicles overseas can vary depending on fuel costs, government tariffs and delays at international ports
• Inflation: monetary inflation can cause widespread price increases
• Incentives for consumers and manufacturers: government programs and tax credits that encourage consumers to buy vehicles and manufacturers to build certain types of vehicles

WHY VEHICLE PRICES MAY DROP THIS YEAR

If you’ve been putting off buying a new or used vehicle, this year could be the time you’ve been waiting for.

The cost of new vehicles has skyrocketed due to several supply chain factors, inflation and a shortage of chips. Unfortunately, it has also driven up the demand (and cost) for used vehicles.

In recent months, however, the vehicle market seems to have stabilized. In Canada, auto sales in January this year were up 7.5% from January 2022, and 2.3% in April from last April, according to the latest sales volume report. of automobiles from Mark Lines.

While auto prices haven’t exactly fallen, the cost of used vehicles fell 1.9% in February and rose 0.6% in March, according to Statistics Canada. This shows that auto costs may stabilize and hopefully decline steadily over the coming year.

Here are some of the main reasons why vehicle prices could fall in 2023.

A HEALTHY OFFER OF NEW VEHICLES

Over the past two years, there has been a shortage in the number of new vehicles available. This was especially true for electric vehicles and luxury/sports vehicles. Buyers were often placed on waiting lists to purchase high-end models.

The imbalance between supply and demand for new vehicles has caused massive price spikes.

This year, auto inventories seem to be improving. Total inventory in Canada fell from 2.38 million in November 2022 to 2.57 million vehicles in March 2023, according to Statistics Canada. With reduced consumer competition for new vehicles, costs are finally normalizing and waiting lists are getting shorter.

INCREASED SUPPLY OF SEMICONDUCTOR CHIPS

Throughout 2021 and 2022, shortages of semiconductor chips squeezed the new vehicle market, driving higher demand and higher prices. Manufacturers had warehouses full of ready-to-deliver vehicles lacking the vital chips needed to power computers and on-board electronics, making them virtually impossible to drive.

Although there is still a shortage of chips, analysts at JP Morgan have indicated that supply is increasing, allowing automakers to potentially increase production worldwide.

REDUCED FUEL COSTS

The global automotive market depends on vehicles and parts being shipped overseas. Ships depend on diesel fuel to power their massive engines. In 2022, crude oil prices soared from an average of US$68.17 to US$94.53 per barrel, an increase of 38.7%.

As fuel costs rose, so did international shipping costs, leading to higher automotive costs across the board.

Currently, the average price sits at $73.81 per barrel as of May 23, 2023, a significant drop from last year. This has made shipping and transportation more affordable for automakers and dealerships, which depend on ground freight deliveries.

IS IT THE RIGHT TIME TO BUY A NEW CAR?

Auto prices are stabilizing, so now might be a good time to buy a new vehicle. However, you should also remember that interest rates and inflation are always high, which could lead to an unfavorable auto loan.

If you plan to buy a new vehicle this year, consider trading in a vehicle with a high trade-in value or putting down a larger down payment to lower your finance and interest costs.

Christopher Liew is a CFA charterholder and former financial advisor. He writes personal finance advice for thousands of Canadian readers daily on his Wealth Awesome website.