J.D. Power: Used Gross Profits Up in Canada; Turn Rates Still Better than January’s
Gross profits on both used-car and used-truck sales in June increased month-over-month in Canada and were ahead of year-to-date trending, according to data provided by J.D. Power and Associates’ Canadian Automotive Practice.
Specifically, dealers pulled in an average of $1,388 of gross profit for every used-car sale in June, which was a $43 increase from May. This also beat the year-to-date average of $1,314.
For used trucks, average gross profits were at $1,674 last month, compared to $1,613 in May. June’s figure was also higher than the year-to-date average of $1,650 per used-truck sale.
Days-to-turn for used vehicles increased slightly from May’s level (approximately 54), but are still down from the beginning of the year, when the turn rate was in the low-to-mid 60s.
J.D. Power also touched on vehicle purchase type for the used market, pointing out that 46 percent of used sales in the past 12 months have done bought via oans. Slightly more than half (51 percent) have been cash purchases and just 3 percent have been leases.
The average used-vehicle transaction price during June was up $443 month-over-month, coming in at $17,825. However, this was below the year-to-date average of $17,902.
June’s Automotive Analyst Note
As part of the monthly analysis and data from J.D. Power, the firm also offered its Automotive Analyst Note from J.D. Ney. This month, Ney tackled monthly payments on new-vehicle loans and took a deeper look into the share these loans are taking up in consumers’ budgets.
“Monthly payments on new-vehicle loans have been essentially flat since 2007, when the average payment was $528,” Ney began. “However, when these results are examined as an overall share of wallet, the view changes dramatically.
Citing Statistics Canada, Ney pointed out that the majority of family types have seen their average after-tax income decline or just not increase at the same pace as inflation.
“As a result, vehicle buyers and manufacturers have resorted to lengthier payment periods and increased debt loads to help maintain the delicate balance,” Ney continued. “While this practice has been successful as a pressure valve for families looking to keep their automotive share of wallet close to status quo, it’s also created several long-term trends worth tracking.”
Sharing more “Behind the Numbers” data, Ney pointed out that the average married couple with no children pulled in a monthly after-tax sum of $6,800 in 2007, according to Statistics Canada. And they put an average of 7.8 percent of their earnings towards a new-vehicle payment.
Three years later, though, that share-of-wallet eclipsed 8 percent, thanks to a modest uptick in payment amount and average after-tax income falling.
“While the automotive share of wallet has increased, vehicle buyers and lenders have used all of the various leveraging tools at their disposal to keep the actual monthly payment as consistent as possible, thus changing the underlying debt environment considerably,” Ney stated.
Since 2007, Ney said there has been an increase in average finance terms from 50 months to 62 months. Each of those years since 2007, the average length of the term has become higher.
In what Ney described as potentially more meaningful, the proportion of Canadian buyers in 2007 whose new-vehicle payment term was at least 72 months was at 6.4 percent. Since then, that proportion has jumped to 40 percent.
Offering more insight, Ney added: “Terms such as ‘negative equity’ or ‘under water’ describe a scenario in which a car buyer owes more on their loan than the car is worth. With finance terms lengthening, the number of new-vehicle purchases that fall into that category is on the rise.”
In fact, more than a quarter (26 percent) of transactions are “under water” these days, Ney said. Five years ago, only 17 percent were.
Additionally, looking at the vehicle loans average total cost (over a four-year period), the loan-to-cost ratio in 2007 was at 107 percent.
Now that ratio is at 114 percent, thanks to extended payment terms. This leads to new cars being “significantly more expensive in the long run,” Ney said.
“This points to a new paradigm, in which the MSRP has become irrelevant to new-vehicle buyers. Today’s vehicle buyers will trade tomorrow’s total cost, in order to balance the monthly checkbook,” Ney continued, wrapping up the analysis. “On a positive note, though, manufacturers and banks have leveraged the financial tools at their disposal to sustain overall vehicle sales in Canada.”