Canadian consumers are likely to tap the brakes on a record spending spree for vehicles, according to the economics research department at TD Bank, which has become a major lender of auto loans in recent years.
“Looking ahead, auto sales are likely to downshift a notch,” TD Economics said Monday.
But TD said it sees a “soft landing” for borrowers, auto dealerships and lenders, echoing sentiments about Canada’s housing market where concerns persist about high prices mixed with high levels of debt.
The view comes as consumers grapple with near-record debt burdens and some corners voice criticism over the sharp growth in lending to car buyers over ever-longer repayment periods.
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Analysts at ratings agency Moody’s said last week new financing terms that have emerged since the recession have become “riskier” for borrowers and lenders because they extend the repayment burden over longer time horizons, increasing the odds of default.
They also encourage consumers to buy “more car” than they otherwise would, increasing overall debt levels.
“Low monthly payments facilitated by low interest rates and longer amortization periods are encouraging consumers to purchase more expensive vehicles,” Moody’s said.
Moody’s analysts noted that some Canadian banks including TD, RBC and Scotiabank, have raced into auto lending in recent years as leasing options for consumers have diminished.
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Softening sales
TD’s soft-landing scenario sees auto sales remaining high through this year but coming down next, declining slightly by 0.5 per cent in 2015. Sales will dip a further 1.7 per cent in 2016, the bank predicts.
“The years of strong annual sales gains are likely in the rear view mirror,” TD economists Dina Ignjatovic and Andrew Labelle, who authored the report, said.
Vehicle sales hit an all-time high of 1.74 million units sold in 2013. High debt loads being carried by consumers entering 2014 as well as expectations for borrowing rates to drift higher set sales expectations lower for the current year.
But consumers have kept buying, buoyed by rock-bottom lending rates that have persisted, as well as rising home prices that have provided a backdrop of consumer confidence, allowing borrowers to trade up vehicles.
Sales in 2014 are expected to eclipse 1.8 million this year, hitting record sales in each of the last six months.
‘Consumers have taken advantage of generous financing conditions to purchase imported higher-priced vehicles’
TD and other banks have stretched out loan lengths to an average of 69 months, or 5.75 years, to help keep payments low – a move that’s allowed Canadians to “shift preferences” to more expensive cars, like European imports, according to Moody’s.
“Consumers have taken advantage of generous financing conditions to purchase imported higher-priced vehicles,” Moody’s analyst Jason Mercer said.
Headwinds
But TD sees headwinds on the horizon. Vehicle ownership rates are now high and should “stabilize”, while pent-up demand appears to be exhausting itself. Borrowing rates should likely rise over the course of next year, tapping the brakes on sales.
“There are several reasons to believe that the years of strong gain may be coming to an end,” the report said.
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Still, car loans that are extending out to as long as 96 months (8 years) will help keep sales from sliding too suddenly, as will improving fundementals in the economy which should help consumers keep making payments, TD said.
“Long loan terms, stronger economic growth and rising incomes should ensure a soft landing, helping to keep auto sales at relatively lofty levels.”
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