Despite improving economic picture, Canada’s auto sales are still dropping

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The jobs market had a strong first half and wages are rising, but there’s still a soft spot in the Canadian economy: Auto sales.

Canadian vehicles sales dropped more than 5 per cent in the first six months of 2019, including a 7.2-per cent-dip in June. That was the 16th straight month in which sales declined, the slump happening despite a spring pickup in economic growth.

After hitting a record high of just over two million sales in 2017, the Canadian auto sector began cooling in 2018 amid global trade concerns and sinking oil prices, said Bank of Nova Scotia analyst Rebekah Young. With Canadians facing higher interest rates and record levels of household debt, some consumers are apprehensive about committing to large purchases like cars.

“There’s been a huge toll on confidence as a result of this uncertain environment,” Ms. Young said. “With the cost of financing, we’ve coming out of a cycle where it’s become more expensive and that’s a drag on 2019.”

While sales have declined across all regions, the slowdown is hitting western provinces the hardest. The region posted a 7-per-cent decline in sales this year through May, as its weakened commodity-driven economy weighs on consumer spending.

Dealerships in Alberta, where a discount on heavy oil prices has hurt the provincial economy, have noticed customers expressing concerns over job security and reluctance to carry more debt. Alberta’s unemployment rate of 6.7 per cent is higher than the national average of 5.5 per cent.

“[Customers] are all about budget. They don’t want a vehicle loan,” said Jordan Burke, a sales manager at the West Edmonton Hyundai dealership. “They’re also worried about job losses because they were working in the oil field and they have since lost that job.”

While the overall Canadian economy posted its best start to a year since 2010 in job creation, and wages increased for the seventh consecutive month, this year’s auto sales are expected to drop to 1.94 million units from 1.98 million last year, according to data from Scotiabank. Ms. Young said that Canada’s high debt-to-income ratio, which is nearing record levels, will largely contribute to the ongoing decline.

“Household debt levels are still high in Canada,” she said. “When interest rates were increasing at the end of 2018, the cost of borrowing for households to buy things like autos increased versus a year ago.”

The drop in activity at Canadian dealerships mirrors global trends. Worldwide, vehicle sales were down about 7 per cent in the first five months of the year, says Scotiabank. U.S. annual sales increased marginally in 2018, to 17.2 million units, but are expected to fall to 16.8 million this year, according to a recent forecast published by the bank, due to a slowing economy and policy uncertainty as the Federal Reserve considers dropping interest rates.

Home-price pressures in Toronto and Vancouver have also impacted Canadian sales. In British Columbia and Ontario, the stress test-induced drop in real estate activity affected consumer need for vehicles, according to a report from TD Economics.

“For British Columbia and Ontario, the sharp slowdown in housing activity last year cut into auto demand,” said TD senior economist Thomas Feltmate in a note. “Home price growth also slowed drastically in B.C. and outright declined in Ontario, diminishing the wealth effects that supported sales in more recent years.”

To attract customers, Mr. Burke said, dealerships such as West Edmonton Hyundai have introduced leasing deals with no down payment — a move he said his company rarely makes. “A lot of consumers are concerned about interest rates. With a lease, they can be tied to a vehicle for a few years, and they haven’t made a big commitment to buying a vehicle," he said, adding that more customers have been asking about leasing options than in the past.

Changing consumer sentiment toward vehicles could have a longer-term effect on auto sales. With young people and families increasingly moving into urban areas, more people are trying to delay car ownership, or forego it altogether.

When lawyer Teresa Yang moved to Ottawa from Toronto in May, she did not plan on purchasing a car even though she planned to live in a residential area with sparse transit access. But when she realized that her commute to work would require an hour-long bike ride, she opted to lease her first car to avoid the commitment of purchasing one.

“I wouldn’t have a car if I didn’t need it just to get to work, because the other options just don’t exist. I never thought I’d ever be a person who would get a car," Ms. Yang said, adding that she would likely drop the lease if she were to have access to a subway or a more efficient public bus.

This trend is currently being offset by a larger population of older people who are continuing to drive later in life, according to Ms. Young.