Used vs new cars: Which market is offering the better deal?

Canadians shopping for a new vehicle this spring and summer might find a bit of relief from recent years of tight supply and high prices.

Experts say there are signs of “normality” on dealership lots after pandemic-era disruptions to automotive supply chains left some buyers waiting months for new vehicles or competing for scarce stock at high prices in the normally affordable used vehicle market.

However, those who spoke to Global News say inventories are not equal across models and automakers. While there are some cases where buyers could secure a discount, some vehicles are still facing fierce competition.

Here’s what to know if you’re searching for a new or used vehicle in 2024.

Supply chain issues such as a shortage of semiconductors, a critical input for modern vehicle manufacturing, snarled the production of new cars during the COVID-19 pandemic.

That short supply of cars sent shockwaves through the new and used car markets, as would-be buyers competed for the precious few cars available. That would send prices soaring on the high-demand models, and upset long-standing dynamics in the used and new vehicle markets.

“At points in the pandemic, you could drive off the lot with a new vehicle and turn around and sell it in the used market for sometimes more than you bought it for, which is … a wild thing to think about,” says Erik Johnson, senior economist at BMO Capital Markets.

Johnson tells Global News the automotive industry had to absorb a series of supply shocks over the past three and a half years, but the shortages and disruptions that stymied production have largely shown signs of resolving over the past year.

“I think we’re actually finally at a point now where we’re seeing supply levels, both in North America and globally, start to get back to what we might consider a little bit more normal in that pre-pandemic context.”

A TD Bank report released Monday also argued that “the automotive industry returned to a state of normality in 2023” as easing supply chain issues helped facilitate a “rebound” in production.

North American production of light vehicles – everything from cars to sport utility vehicles (SUVs) and lightweight pick-up trucks – was up 9.6 per cent last year, 3.9 per cent below 2019 levels, according to author Andrew Foran. That meant, to start 2024, inventory levels were at their highest level in three years, he said.

Shari Prymak, executive director of Car Help Canada, tells Global News that there has been “some improvement” in the inventory situation for new vehicles.

Production times for many cars have come down, but he notes that for the most popular vehicles, there will still be a waiting period – likely a few months, compared to the lags upwards of a year during the height of the supply chain kinks.

Shortages persist on the most affordable and in-demand vehicles in the market, Prymak says. He singles out hybrid models as having particularly high demand, which for consumers means long waiting times, still-high prices and little negotiating room with a dealer.

There’ve been signs of improvement across inventory lines at dealerships in the United States, but Prymak cautions these supply levels haven’t quite picked up in Canada to the same degree.

Johnson says dealers of domestic North American automakers are more likely to have ready supply on their lots, while consumers can expect to compete more readily for vehicles from popular overseas manufacturers like Toyota.

The AutoTrader.ca Price Index for the first quarter of this year pointed to signs of prices easing overall for both new and used vehicles amid growing inventories in both markets.

The report expects that new vehicle prices peaked in September 2023. While the average new vehicle price of $66,422 in March was up 7.4 per cent compared to last year, that represented a slight drop of 0.8 per cent on a monthly basis.

For used vehicles, the average price was $37,662, representing a drop of 4.0 per cent year-over-year and down 2.1 per cent from February.

Demand is shifting away from used cars as new vehicle supply improves and financing rates tied to higher interest rates box low-income consumers out of the market, according to AutoTrader.

The report said it expects the trend of used car prices to continue to normalize in the months ahead, but cautioned that prices won’t return to their pre-pandemic levels “anytime soon.”

“Unfortunately, the used car market is still extremely tough,” says Prymak. “The prices are tremendously overinflated.”

Because the delta in prices between new and lightly used vehicles (one-to-three years old) is not that great, he recommends buyers reconsider whether the slight savings they will eke out going for a used vehicle is worth the trade-off in quality.

Prymak says that interest rates tend to be higher on used vehicles as well, so anyone financing a used vehicle may not be saving that much in their payments compared to a new model.

“If you’re not saving a significant amount of money, then there’s really no reason or incentive to be purchasing a used vehicle,” he says.

Despite pressures from higher interest rates and a slowing economy, thus far, Canadian auto sales have held up well, says Johnson. Rates on financing from a chartered bank today are close to the seven-eight per cent mark, he says, compared to interest rates below five per cent in the pre-pandemic era.

This past February marked an all-time high for vehicle sales in the month, Johnson notes, though he adds a caution that there are some forces under the hood that might serve as a caveat.

Canada’s robust population growth has meant there are simply more buyers in the market than there would have been otherwise; on a per-capita basis, February was not a record-setter for vehicle sales, Johnson says.

Much of the run-up in recent sales has been thanks to pent-up demand from buyers who couldn’t buy the vehicle they wanted during the long delays tied to supply chain delays, he adds.

Johnson says that while demand has been robust to-date, there are still signs of looming tightness for Canadian consumers. The Bank of Canada’s financial stability report released last week highlighted that half of all Canadian mortgage are still set to renew in the next two years, which will force many homeowners to tighten their purse strings.

That could slow down activity in the car market, Johnson argues.

“Maybe we’ve hit a little bit of a speed limit here in that, if you’re anticipating new vehicle sales to completely continue to accelerate, I think that’s a little bit of a stretch of where the consumer environment is today,” he says.

TD Bank forecasts sales will rise 9.6 per cent this year before converging with pre-pandemic levels of activity in 2025, driven in part by an eventual loosening in borrowing costs fuelling demand.

Charles Bernard, chief economist at the Canadian Automotive Dealers Association, tells Global News that signs of reduced demand and growing inventory will help to stabilize prices and help consumers who are looking for a deal.

“It’s a good indication that we’re entering a more stabilized market where usually you should see prices go down and then incentives go up,” he says.

Bernard says there are some categories of vehicles where suppliers “overbuilt,” and therefore are more likely to offer discounts and other incentives to get consumers onto the lot.

You can hear this, he says, on local radio and television stations – dealers didn’t have to advertise flashy financing deals during the height of the pandemic-era market when demand was high and supply was tight.

Bernard highlights the luxury and electric vehicle markets in particular as segments rife with inventory where incentives are likely to be more common for buyers.

Prymak agrees that both of these parts of the market are likely to offer more discounts, as well as larger vehicles like pick-up trucks and domestic brands like General Motors, Stellantis and Ford.

Higher-priced vehicles have a better inventory than the more affordable and high-demand models, he notes. Inventory levels in the more affordable categories might improve through the year, but Prymak says he doesn’t expect incentives to pick up on these vehicle sales until 2025.

Johnson says that in today’s market, households who are committed to a single brand for every car they buy might be forced to broaden their horizons if they’re hoping for a deal.

Buyers are more likely to head to the dealerships with a specific number in mind for the payment they can handle, and may “trade down” a luxury brand to a vehicle that’s less in-demand in the Canadian market.

He cites Mitsubishi as one brand that saw a boost in sales last year because it’s “absorbing some of that movement down the price ladder” from automakers like BMW.

Buyers looking for the most popular Honda or Toyota compact or subcompact SUVs will have little room to negotiate with dealers in this high-demand segment this summer, Prymak says.

But he, too, encourages buyers to have “flexibility” and look at more under-the-radar brands where inventories might have had more time to build up and competition is less fierce.

“In that case, there could be more incentives, more room to negotiate with the dealership and get yourself a better deal,” Prymak says.