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Auto Prices Expected to Slide Further

By Greg Keenan, Auto Industry Reporter, Globe and Mail

Scotiabank economist credits strong dollar, incentives and imports with helping to reduce sticker shock.

Vehicle prices, which have fallen by about 5 per cent this year as companies operating in Canada battle cross-border vehicle shopping, should continue to fall, says Bank of Nova Scotia economist Carlos Gomes.

Auto makers in Canada have increased incentives to try to reduce the price gap that has led to record imports of vehicles from the U.S. market this year, Mr. Gomes said yesterday in his monthly report on the auto industry.

Imports of vehicles bought by Canadians in the United States hit a record of almost 25,000 last month, are on pace to reach another 22,000 to 23,000 in November and will likely hit an annual record when the results for all of 2007 are tallied.

That has helped bring prices down this year, compared with the previous eight years when prices were flat, Mr. Gomes said.

"While [manufacturers suggested retail prices] on many vehicles remain $4,000-$5,000 higher in Canada than in the United States, the decline in new vehicle prices in Canada has intensified since the spring, leading to lower prices for used vehicles, especially one-year-old models," Mr. Gomes said.

Price should continue to fall, he said, if the dollar stays relatively strong.

"This reflects the fact that with macroeconomic trends continuing to weaken in the United States, used car prices will face downward pressure south of the border," Mr. Gomes said.

Auto makers are reluctant to cut MSRPs in Canada, he said, because a record 550,000 vehicles are scheduled to come to the end of their leases next year, up from a five-year low of 470,000 units last year.

Cutting prices would reduce the residual values of those vehicles and potentially lead to massive losses for dealers or auto financing companies that could have to buy them back from the people who leased them.

The Automobile Protection Association, a Toronto-based consumer advocacy group, is urging buyers to sit on their hands and not buy new vehicles until next year, anticipating that the U.S. slowdown will lead to heavy purchase incentives in that market.

"With some concerted inaction by Canadian buyers, some of those price reductions may actually follow here," APA president George Iny said.

Several auto makers sponsored an eight-page advertising supplement in The Globe and Mail yesterday that included messages from senior executives of Audi Canada, Toyota Canada Inc. and Volvo Canada Inc., outlining why prices differ between Canada and the United States and what they're doing about it.

The issue has become a political hot potato for the federal government because some Canadians who bought cars in the U.S. have been prevented from bringing them into Canada, or, if they've been allowed to bring them in, must park them - at least temporarily. That's because of a Transport Canada regulation that came into effect Sept. 1 requiring a theft immobilization device.

People who bought such vehicles but were turned away at the border are now able to bring the cars and trucks in, but can't drive them until the department rules on the issue.