BUSINESS

BETTER THAN NEW

Used-car prices jump as consumer demand grows

BRENDA DALGLISH July 10 1995
BUSINESS

BETTER THAN NEW

Used-car prices jump as consumer demand grows

BRENDA DALGLISH July 10 1995

BETTER THAN NEW

Used-car prices jump as consumer demand grows

BUSINESS

BRENDA DALGLISH

On a hot, hazy morning last month, 150 Ford dealers from Ontario, Quebec and Manitoba converged on the country’s largest used-car auction, on the outskirts of Toronto. In three hours of fevered bidding, the dealers snapped up most of the 450 vehicles on offer—mostly 1994 or 1995 models in good condition, many loaded with options and driven for only a few thousand kilometres by Ford executives or customers who had signed short-term leases. Most of the sales took place in 30 to 60 frenetic seconds of rowdy bidding. Still, auctioneer Bob Dickenson, president of Canadian Auto Auction Group Inc. of Montreal, said that the sale was unremarkable except for one thing. “Prices,” he said hoarsely, “are higher than two weeks ago.” That sums up the current state of Canada’s used-car market. With consumer demand rising and supply constrained by several factors, including the tendency of new-car owners to hang on to them longer, prices for used vehicles have been climbing steadily. Recent surveys indicate that consumers rank buying a used car near the top of their 10 most desired purchases, while buying a new car is near the bottom of the list. And according to one recent study, nearly three times as many shoppers now want to buy a used, rather than a new, vehicle.

Since the last recession began in 1990, Canadians have purchased an average of 1.25 million new cars and trucks annually, compared with the country’s all-time high of 1.5 million in 1988. That means fewer cars are available to be traded in and resold as used vehicles. As a result, industry insiders say that they are starting to worry that there could soon be a shortage of

used cars. And with well-maintained used cars commanding higher prices, some observers say that previously owned vehicles are not as good a deal as they once were. “I wouldn’t buy a used car today,” said Dennis DesRosiers, president of DesRosiers Automotive Consultants Inc. of Toronto. “I don’t think you get value for money. You significantly overpay in the used-car market today.” At the same time, DesRosiers says the automakers, hungry for new vehicle sales, are offering particularly good deals.

Still, escalating new car prices are often cited as one of the main causes of the heightened demand in the used-car market. Adding to the cost are new government requirements for safety and pollution standards. As well, manufacturers are loading new models with expensive options like power windows and keyless locks. George Iny, the Montreal-based president of the consumer group Automobile Protection Association, says that an average wage earner must now work about 27 weeks to afford a new car, compared with 21 weeks a decade ago. “New cars,” said Iny, “are being priced out of reach of a lot of people right now.” Added Bob Pierce, chief executive of the

Ontario Automobile Dealer Association in Markham, Ont.: “People go in to the dealer to try out a new car, but when they get a look at the price they start thinking about used.”

Another factor contributing to increased demand in that market segment is that the quality of many used autos has increased significantly since the mid-1980s. In the past, many North American vehicles were worth little after they had been on the road for five or six years. But under intense pressure from Japanese competitors, domestic automakers have improved the quality of their products. The result is that cars last longer and command higher prices.

In addition, consumers in the 1990s—still struggling with the lingering impact of the last recession—are more reluctant to accumulate debt. There has also been a pronounced shift in consumer values since the glory days of the 1980s. “There’s kind of a reverse cachet now about buying used,” said Phil Edmonston, a Montreal consumer advocate and former member of Parliament who publishes Lemon Aid, an annual guide to the used-car market. “It used to be, ‘Hey, did you see all the bells and whistles on my new Lexus?’ ” Edmonston

ZIPPER: A vehicle that has been badly damaged in an accident, then reconstructed with body parts from other cars.

CURBSIDERS: Unregistered dealers who pose as private owners to peddle used cars from parking lots and other public locations.

CLOCKERS: Mechanics who are expert at rolling back odometers.

PICKERS: Agents who, acting for U.S. buyers, visit Canadian used-car auctions and wholesalers in search of well-maintained cars and trucks.

UPS: New customers at an auto dealership, so-called because sales staff have to get up out of their chairs to greet them.

BE BACKS: Shoppers who promise to return.

notes. “Now, it’s, ‘Hey, did you see the Lexus I got for $29,000?’ ” Meanwhile, even as demand grows, the supply of used cars is being depleted by outside forces. The 1988 Free Trade Agreement has phased out the previous restrictions on the movement of used cars between Canada and the United States. As a result, American car dealers have increasingly become a force in the Canadian used-car market. They have been buying at the auctions, from wholesalers and directly from car rental companies and bank leasing operations, which regularly sell large numbers of late-model cars with moderate mileage. “The pickers come up here and take the cream of our used cars,” said Iny. “There are two reasons why they come: the Canadian dollar has been weak, and the price of new cars is cheaper in Canada to start with.”

In fact, the disparity between Canadian and U.S. new-car prices is

often significant. A Ford Escort carries a manufacturers’ suggested retail price (MRSP) of $12,995 in Toronto. Just across the border in Buffalo, N.Y., an Escort with the same equipment is listed at $12,925 (U.S.)—the equivalent of about $17,700 Canadian. A Buick Skylark's MRSP in Toronto is $19,035. A Chicago dealership listed it for $15,065 (U.S.), or the equivalent of about $20,700 Canadian. Even with generally higher sales taxes in Canada, consumers north of the border tend to pay less than their American counterparts. Stewart Low, a spokesman for General Motors of Canada Ltd. in Oshawa, ascribes the price difference to market conditions. “The whole skew of the market is different here,” said Low, noting that fuel prices are higher, taxes are higher and Canadians have far less disposable income.

As a result of those factors, the manufacturers tend to price their cars lower in Canada. “Quite frankly,” said Low, “all manufacturers discourage cross-border sales by their Canadian dealers.” Edmonston says that the manufacturers can bring pressure to bear on their Canadian dealers not to sell to American customers, so the price disparities can be maintained in the new-car market. Among other things, manufacturers can refuse to honor foreign customers’ warranties and other contracts, and they can punish dealers directly by refusing to supply needed inventory or by taking away the franchise entirely. So while manufacturers can control the new market, they have little say in the used market. « And since the only major differences between £ the U.S. and Canadian versions of newer modz els is that the Canadian vehicles must be ^ equipped with daytime running lights and I metric odometers, there are no mechanical i reasons why Canadian vehicles cannot be used in the United States. As a result, American dealers have found that they can buy good-quality used vehicles in Canada and resell them at a profit.

Michael Lawrence, chairman of Canadian Auto Auction Group, says that his company began noticing an increasing number of U.S. buyers at its nine Canadian auction locations about two years ago. He credits the particularly low Canadian dollar at the time, as well as a big demand in the United States for good used vehicles, for the change. Although Lawrence says that it is impossible to know exactly how many Canadian vehicles are going south, there is no doubt that U.S. dealers are scooping up some of the most popular used cars, as well as trucks and sport utility vehicles like the Ford Explorer and Jeep Cherokee. Lawrence says that the practice is so well established that in Seattle one of the leading auto auction companies has dedicated an entire sales lane to Canadian vehicles. “We just see the tip of the iceberg,” said Lawrence.

According to Lawrence, Canadian dealers are now forming partnerships with American dealers. Together, they buy cars in the Canadian market and then ship the vehicles to the United States. If the cars are legitimately registered at the border, the American dealer has to pay a $500 fee per vehicle, as well as other costs. But Lawrence says that some dealers have also found other—less straightforward—ways to move vehicles across the border. Bert Dagnon, the chief financial officer at Canadian Auto Auction, estimates that based on his firm’s business, “at least 1,000 vehicles a week leave the Toronto area for the United States.” Foreign buying is helping to push up prices, as well as reducing the volume of available used vehicles in the domestic market. As a result of increased demand from Canadian consumers and

foreign buyers, Dagnon estimates that the average sale price of vehicles sold at his company’s auction has increased to $11,000, from about $9,800 18 months ago.

But rising prices and dwindling supply are just two of the problems emerging in Canada’s used-car market. While a growing number of high-quality used autos are leaving the country, inadequate legislation in most provinces leaves the door open for troubled, and in some cases potentially dangerous, cars to come in. Ontario and most other provinces currently lack legislation to ensure that a vehicle’s history—including whether it has ever been damaged or stolen—is permanently recorded and available to consumers. A national task force was struck in 1991 to consider the introduction of so-called branding legislation that would require a permanent stamp on the registration documents of vehicles that had been junked, wrecked and rebuilt. Although the task force is continuing to consider the issues, currentiy only Quebec and Alberta have laws which ensure that information is available.

As a result, some provinces—in particular, Ontario—are turning into vehicle laundering centres, where wrecks from other provinces and even the United States are sold after having been rebuilt. Iny says that there may be nothing wrong with rebuilding and selling a vehicle that has been badly damaged. But, he adds, that information should be publicly available when a consumer is deciding what to pay for the product. And, he says, such legislation should require that rebuilt wrecks are carefully inspected to meet minimum safety standards. Without the registration system in place, a vehicle’s unsavory history can easily be concealed. “Ontario is becoming a dumping ground for stolen and written-off vehicles,” said Pierce. “It’s becoming the Panama of the used-car industry.”

According to some experts, wrecked and stolen vehicles from other states and provinces are also being “washed” through Canada. Dick Morse, chief of odometer fraud for the U.S. government in Washington, said he accidentally discovered a scam two years ago in which registration papers for New York vehicles whose odometers had been rolled back were being sent to Ontario, and stamped as though the vehicles had actually been imported to Canada. Then, the papers were sent back to the United States with the vehicles’ histories erased.

Despite such problems, used cars appear likely to remain popular for a growing number of buyers. In fact, many industry insiders, government regulators and auction operators say that they, too, prefer to buy used rather than new. “Without a doubt,” said Edmonston, whose annual used-car guide outsells his new car guide. “I’ve always recommended that people buy a twoto three-year-old vehicle. I wouldn’t buy new.” He owns a 1982 Chevrolet van and a 1991 Ford Probe, both purchased used. “They’re running great,” said Edmonston. Of course, if the demand for older cars continues to rise, even he may eventually be forced to consider a new car. □