If you’re among the potential vehicle buyers, you might be curious about when prices will eventually decrease. Over the past two years, the exorbitant prices of both new and used vehicles have deterred numerous who may have otherwise contemplated trading in their vehicle or purchasing a new one.
Encouragingly, there are signs that the vehicle market is beginning to stabilize, indicating a potential significant decrease in the prices of both used and new vehicles in the upcoming months. In this discussion, I will delve into the reasons behind the potential drop in vehicle prices and highlight the factors driving the current costs of vehicles.
THE DRIVING FACTORS BEHIND AUTOMOTIVE PRICES
The cost of new and pre-owned cars, along with commercial vehicles like trucks, tractors, and transport vans, can exhibit substantial variations influenced by various factors and prevailing economic conditions.
Most vehicles rely on parts sourced from various global locations. For instance, Japanese manufacturers may acquire chips from Taiwan, while U.S. manufacturers might obtain suspension components from China, and so forth.
In recent years, the world has experienced significant political and economic uncertainty, leading to notable price increases in various commodities, including building materials, gaming systems, and, of course, vehicles.
There are several factors that influence automotive prices, including:
- Supply and demand: The balance between the number of vehicles available in the market and the demand for them plays a significant role in pricing.
- Supply chain: The ease of sourcing parts and components needed for vehicle manufacturing affects production costs, which can impact prices.
- Shipping costs: The expenses associated with shipping vehicles, such as fuel costs, government tariffs, and potential delays at international ports, can affect overall pricing.
- Inflation: General inflation in the economy can lead to price increases across various sectors, including the automotive industry.
- Consumer and manufacturer incentives: Government programs, tax credits, and incentives that encourage consumers to purchase vehicles and manufacturers to produce specific types of vehicles can influence pricing dynamics.
WHY VEHICLE PRICES COULD DROP THIS YEAR
If you’ve been postponing your decision to buy a new or used vehicle, this year might present the opportune moment you’ve been anticipating.
The cost of new vehicles surged due to various factors in the supply chain, inflation, and a chip shortage. Unfortunately, this increase in demand and cost also extended to the used vehicle market.
In recent months, there has been a noticeable stabilization in the vehicle market. In Canada, auto sales in January of this year saw a 7.5 percent increase compared to January 2022, and this April recorded a 2.3 percent growth compared to the same month last year, as reported in Mark Lines’ latest auto sales volume report.
While auto prices haven’t experienced a drastic decline, there has been a slight decrease in the cost of used vehicles by 1.9 percent in February, followed by a 0.6 percent increase in March, as reported by Statistics Canada. These fluctuations indicate a potential stabilization in auto costs, raising hopes for a gradual decrease throughout the upcoming year. Here are some key factors that contribute to the possibility of vehicle prices dropping in 2023.
A HEALTHY SUPPLY OF NEW VEHICLES
Over the past few years, there has been a scarcity of new vehicles in the market, particularly for electric vehicles (EVs) and luxury/sports models. Many buyers faced lengthy waiting lists to acquire these high-end vehicles.
The imbalance between supply and demand in the automotive industry led to significant price increases. However, there are positive signs this year as automotive inventories are starting to improve. According to Statistics Canada, total inventory in Canada increased from 2.38 million vehicles in November 2022 to 2.57 million vehicles in March 2023. With reduced consumer competition for new vehicles, costs are gradually returning to normal, and waiting lists are becoming shorter.
INCREASED SUPPLY OF SEMICONDUCTOR CHIPS
During the years 2021 and 2022, the shortage of semiconductor chips had a significant impact on the new vehicle market, leading to increased demand and higher prices. Manufacturers faced the challenge of having warehouses full of vehicles ready for delivery, but without the essential chips required to operate the onboard computers and electronics, making these vehicles practically unusable.
Despite the persistent chip shortage, there are positive signs of improvement. Analysts at JP Morgan have reported an increase in chip supply, which could potentially enable auto manufacturers to ramp up production globally. This development offers hope for alleviating the constraints on vehicle production and meeting the growing demand in the market.
REDUCED FUEL COSTS
The global automotive market is highly dependent on international shipping for the transportation of vehicles and parts. Shipping vessels, which operate on diesel fuel, play a vital role in this process. However, in 2022, crude oil prices experienced a significant surge, with the average price per barrel increasing from US$68.17 to $94.53, representing a substantial 38.7 percent rise. This increase in fuel costs has added to the overall expenses involved in shipping, consequently impacting the automotive industry.
The rise in fuel costs directly impacted international shipping expenses, subsequently driving up automotive costs in various sectors. However, there has been a notable improvement in the fuel cost situation. As of May 23, 2023, the average price of a barrel of crude oil stands at $73.81, reflecting a substantial decrease compared to the previous year. This decline in fuel prices has resulted in more affordable shipping and transportation for auto manufacturers and dealers who heavily rely on ground freight deliveries.
IS IT A GOOD TIME TO BUY A NEW CAR?
With auto prices stabilizing, now may be a favorable time to consider purchasing a new vehicle. However, it’s important to keep in mind that interest rates and inflation remain high, which could impact the terms of your auto loan. To mitigate potential financial challenges, there are a few strategies to consider. Firstly, explore the option of trading in a vehicle with a high trade-in value, as this can help offset the cost of your new purchase. Additionally, making a larger down payment can reduce your financing amount and subsequent interest costs. By carefully evaluating these factors and planning your purchase accordingly, you can make a more informed decision that aligns with your financial goals.