Stronger loonie, more inventory at home likely to cool American buying activity here: CBB

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Canadian Black Book says it is unlikely the 0.25 per cent key interest rate increase will get passed onto consumers in the short term.

Still, the company noted that if rates continue to climb, at some point the OEMs will have to pass along those costs to vehicle buyers, initially resulting in less cash incentives.

“For the most part, manufacturer new vehicle incentive budgets will likely absorb the rate hike for consumers so that they can continue to advertise 0 per cent or 0.9 per cent or 1.9 per cent for new cars,” Canadian Black Book (CBB) wrote in an industry missive.

“To keep things in perspective, on a $40,000 car loan a hike of 0.25 per cent is only an extra $100 per year of interest. “

Analysts say the bigger impact of a rate increase is its immediate effect on the strength of the Canadian dollar and what that will mean to the Canadian auto industry.

The more valuable dollar is of greater concern, for both the new and used vehicle market in Canada as it could lead to a cooling of new vehicle sales and is expected to cause Canadian used vehicle prices to fall over time.

The dollar has increased $0.06 since May.

“As the strength of our dollar had been declining since 2013, U.S. interest in Canadian used vehicles increased. Depending on who you ask, upwards of 200,000 vehicles have been being exported to the U.S. annually,” the company wrote.

As reported numerous times in Canadian AutoWorld, U.S. buyers and Canadian exporters have been taking full advantage of a lower Canadian dollar by moving vehicles across the border to sell at a higher price.

This export demand has inflated used-car prices domestically. As a result, Canadian consumers are being pulled out of their vehicle loans/leases early by dealers who are eager to sell the consumer’s current vehicle on the used market and put the consumer into a brand new one, often for the same or lower monthly payment.

The pull forward activity has been seen across virtually all brands and has been a major factor behind the last four years of record sales and the strong performance year-to-date in 2017.

Figures from the company’s U.S. parent show domestic supply of U.S. used vehicles is up by about 500,000 more off lease units versus past years. The Black Book (USA) Price Index is showing a 10 per cent decline since last year.

With the U.S. vehicle market bracing for a large downward adjustment in used prices, a stronger Canadian dollar could all mean less demand for Canadian used vehicles from U.S. buyers.

“At some point soon, the rising Canadian dollar and falling U.S. used vehicle prices will make it unattractive for U.S. buyers to purchase Canadian inventory in such large volumes,” CBB wrote.

CBB said it expects a $0.85 dollar is around the tipping point for U.S. exports to significantly slow.

“On the positive side, Canadian used vehicle shoppers and used vehicle dealers will be rewarded with better deals in the market compared to what they have seen over the last few years.”