TORONTO, March 29 /CNW/ - After strengthening since late 2003, used car
prices have recently weakened in both Canada and the United States, alongside
softer economic conditions and an increased supply of pre-owned vehicles,
according to the latest Global Auto Report released today by Scotia Economics.
    "The decline began in Canada last summer, as rising imports of
second-hand models from the United States undercut pricing for pre-owned
vehicles in Canada," says Carlos Gomes, Scotiabank's auto industry specialist.
"However, the weakness has spread south of the border, with slowing U.S.
economic growth beginning to dampen household purchasing power."
    The 'Scotiabank Used Car Price Index', which tracks prices in Canada's
pre-owned vehicle market, began to weaken in mid-2006, with the decline
accelerating in recent months. In February, the Index dropped eight per cent
below a year ago, the weakest performance since the economic downturn of the
early 1990s. The decline reflects a 40 per cent year-over-year surge in the
number of second-hand vehicles imported from the United States, as well as
some reduction in demand for pre-owned vehicles.
    In the United States, Manheim Auctions indicates that used vehicle prices
have also been softening since October, and were down two per cent
year-over-year as of February. The decline reflects slower economic growth,
dampening demand for pre-owned vehicles, even though these models are more
affordable and their demand is normally more stable than new models. According
to Adesa, sales of used cars and light trucks in the United States fell by
four per cent last year, the largest decline since the economic downturn of
the early 1990s.
    After declining steadily between 2002 and 2005, the number of vehicles
coming off-lease has also started to edge higher in Canada and the United
States, boosting the supply of used vehicles and providing some downward
pressure on prices. We estimate that the increase in the number of vehicles
leased in Canada, from a low of 500,000 units in 2001 to nearly 650,000 in
2005, will translate into an additional 100,000 vehicles coming off-lease in
2007 and in 2008.
    "The increased availability of secondhand vehicles comes at a time when
Ottawa is attempting to persuade Canadians to scrap their older, high
pollution-emitting cars and light trucks and replace them with newer, more
fuel-efficient models," says Mr. Gomes. "In the latest Budget, the federal
government indicated that it will provide $36 million in incentives over the
next two years for Canadians to replace vehicles built prior to the 1995 model
year."
    Late-model imports into Canada from the United States surged to almost
60,000 units in 2006, double the level in 2004, and have soared more than
four-fold since the turn of the millennium. In contrast, in recent years,
Canadian exports of second-hand vehicles to the United States have been
undercut by the appreciation of the Canadian dollar. We estimate that Canadian
exports of used vehicles were cut in half in 2006, as the currency climbed to
an annual average of 88 cents (US) from a low of 64 cents (US) in 2002. As a
result, Canada now has an annual trade deficit in used vehicles of more than
42,000 units compared with a surplus of more than 34,000 as recently as 2002.
    Turning to the new vehicle market, sales edged down across North America
last month, with purchases declining below a year ago in Canada, the United
States and Mexico for the first time since last July. U.S. sales eased to an
annualized 16.6 million units in February from 16.7 million in the previous
month. However, the results were better than expected, due to a three per cent
year-over-year gain at General Motors and a further double-digit increase at
Toyota.
    Passenger vehicle sales also edged down in Canada last month, but
remained above an annualized 1.60 million units for the fourth consecutive
month. As in recent months, volumes were strongest among imported brands, with
purchases advancing eight per cent year-over-year. Several automakers,
including Toyota, Nissan and BMW, posted record sales for the month of
February. In contrast, volumes weakened further for the traditional Big Three,
with sales in February falling six per cent below a year ago.

    Scotia Economics provides clients with in-depth research into the factors
shaping the outlook for Canada and the global economy, including macroeconomic
developments, currency and capital market trends, commodity and industry
performance, as well as monetary, fiscal and public policy issues.