TORONTO, April 30 /CNW/ - Used car prices are expected to continue their
decline throughout 2008 and into 2009, as economic conditions in North America
continue to moderate, according to the latest Global Auto Report released by
Scotia Economics.
    "Used car prices have been declining across North America since late
2006, but the weakness accelerated in early 2008 alongside deteriorating
economic conditions - especially in the United States," said Carlos Gomes,
Scotiabank Senior Economist and Auto Industry Specialist. "We expect used car
prices to continue to soften through early 2009, pressured by rising
unemployment in both the United States and Canada."
    The weakness in pre-owned vehicle prices began in Canada, with rising
imports of secondhand models from the United States undercutting pricing for
pre-owned vehicles. However, the decline has spread south of the border, as
slowing U.S. economic growth and rising energy and food costs have dampened
U.S. 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 the first quarter
of 2008, the index dropped 7 per cent below a year ago, led by an 11 per cent
slump in the price of one-year old models - the weakest performance on record
for data back to 1978.
    "A record number of vehicles coming off-lease in Canada is also dampening
used car prices," said Mr. Gomes. "We estimate that more than 550,000 cars and
light truck leases will expire in Canada this year, adding to the glut of more
than 200,000 used vehicles that will be imported from the United States."

    North America sees overall drop in auto sales, while crossover utility
    vehicles surge

    Vehicle sales across North America weakened significantly in March,
slumping 11 per cent below a year earlier.
    The United Sates accounted for most of the decline, with purchases diving
12 per cent year over year to an annualized 15.1 million units - the lowest
level since October 2005, in the aftermath of Hurricane Katrina and down from
a full-year 2007 total of 16.1 million units. Volumes were undercut by falling
house prices, the ongoing sub-prime mortgage crisis, rising unemployment,
record gasoline prices and deteriorating consumer confidence - currently at a
five-year low.
    Light trucks led the decline, slashing the annualized sales pace of these
models to the lowest level since the height of the Asian currency crisis a
decade ago. In particular, sales of SUVs plunged 32 per cent below a year
earlier, while pickup trucks slumped 23 per cent, with demand sapped by U.S.
gasoline prices above $3.30 per gallon for the first time on record. These two
segments now account for less then 25 per cent of overall U.S. new car and
light truck purchases, down from nearly 30 per cent a year ago and an average
of 36 per cent in the 2001 to 2003 period.
    Vehicle sales in Canada also fell below a year ago in March, reversing
double-digit advances in each of the previous two months. "We estimate that
purchases softened to an annualized 1.65 million units in March, down from an
average of 1.79 million in January and February," said Mr. Gomes. "As in the
United States, the decline was concentrated among light trucks, with SUVs and
pickup truck sales leading the fall-off."
    In contrast, the popularity of crossover utility vehicles (CUVs)
continues to surge, with purchases in Canada soaring nearly 30 per cent year
over year in the first quarter of 2008. These vehicles now account for 20 per
cent of total new vehicle sales in Canada - double their share as recently as
2004, and second only to small cars, a segment that garners more than
one-third of the Canadian market. In fact, CUVs have become so popular across
North America, that Ford is hiring an additional 500 workers at its plant in
Oakville, Ontario - the production site of the Ford Edge and the Lincoln MKX
crossover utility vehicles.

    Economic Factors and Outlook

    The ongoing credit crunch is also cutting into vehicle demand by reducing
not only the number of auto loans, but also the loan value and the length of
term. Furthermore, loan spreads above prime have tripled compared to recent
years, as the market is re-pricing risk.
    "These factors will deepen the cyclical decline in vehicle sales and
pricing, but will set the stage for a recovery in 2009," said Mr. Gomes. "In
fact, early long-term leading indicators of economic activity - such as the
slope of the yield curve - have started to improve in both Canada and the
United States. However, changes in the slope of the yield curve lead both
employment growth and vehicle pricing by about seven quarters, suggesting that
a bottom in vehicle prices is unlikely until early 2009."

    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.