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Do Car Prices Drop in a Recession?

Do Car Prices Drop in a Recession?

A recession refers to a period of significant economic decline, characterized by a decrease in economic activity, rising unemployment rates, and a contraction in consumer spending. In Canada, the economy officially entered a recession in early 2024, triggered by a combination of factors, including persistently high inflation, rising interest rates, and declining consumer confidence.


During a recession, consumers tend to curtail their spending, particularly on big-ticket items like vehicles. As disposable incomes shrink and job security becomes a concern, many Canadians prioritize essential expenses and delay major purchases. This reduction in demand can have a ripple effect on the automotive industry, leading to a slowdown in sales and potentially lower vehicle prices.


Inflation, which remained stubbornly high throughout 2023, played a significant role in contributing to Canada’s 2024 recession. As the cost of living continued to rise, household budgets were stretched thin, leaving less room for discretionary spending. To combat inflation, the Bank of Canada implemented aggressive interest rate hikes, making borrowing more expensive for consumers and businesses alike.


Rising interest rates, in turn, had a direct impact on the affordability of car loans and leases. As financing costs increased, many Canadians found it more challenging to secure favorable terms, further dampening demand for new and used vehicles. With consumer spending power diminished, the automotive industry faced mounting pressure to adjust pricing strategies and incentives to attract buyers.

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Record High New Car Inventory Levels

One of the key factors influencing whether car prices will drop during Canada’s 2024 recession is the unprecedented level of new vehicle inventory. After years of pandemic-related supply chain disruptions that constrained production and created shortages, automakers have finally caught up with pent-up demand.

According to data from AutoTrader.ca, new vehicle inventory across Canada hit a record high of over 300,000 units in early 2024. That’s nearly double the pre-pandemic inventory levels from early 2020 before COVID-19 lockdowns began impacting auto manufacturing. Dealer lots are suddenly flush with models from compacts and sedans to trucks and SUVs.

This inventory surplus is being driven by the automotive industry’s efforts to ramp up production and make up for lost sales during the supply chain crunch of 2021-2023. With microchip and other parts shortages largely resolved, assembly plants have been running at maximum capacity. However, that production surge is now outpacing consumer demand amidst economic headwinds.

The oversupply situation is most pronounced for mainstream brands and high-volume models. Certain luxury and niche vehicles are still facing tight inventories and strong pricing power. But for the average Canadian car buyer, the sheer number of options available provides negotiating leverage not seen in several years.

 

Will New Car Prices Drop in the Recession?

As Canada finds itself in a recession in 2024, many prospective car buyers are wondering if this economic downturn will finally bring some relief from sky-high new vehicle prices. The pandemic-driven supply chain disruptions that crippled automotive production over the past few years have led to record-low inventory levels and sent prices soaring.

However, the situation has started to improve in recent months. New vehicle inventory reached record highs in early 2024 as supply chain issues eased, giving buyers more options but also putting pressure on automakers and dealers to offer discounts and clear inventory.

According to industry data, the average new car transaction price remains about 15% above pre-pandemic levels as of early 2024. But there are signs that prices could slowly start trending downward, at least for certain models and segments.

Mainstream brands and high-volume models are expected to see more significant price drops first as automakers look to rekindle consumer demand. Luxury brands and in-demand vehicles like trucks and SUVs have been able to maintain higher prices so far, but analysts predict they won’t be immune to discounting if the recession deepens.

While buyers may not see the dramatic discounts of 10-20% off sticker price like in previous recessions, a gradual softening of new car prices is anticipated through 2024 as supply outpaces demand. Savvy shoppers willing to buy less popular models or colors can likely negotiate 5-10% below MSRP, especially on outgoing 2023 model year vehicles.

 

Used Car Price Outlook and Market Dynamics

The used car market has seen significant price fluctuations in recent months, with a notable decline in late 2023 as the economic downturn and higher interest rates impacted consumer demand. According to industry data, used car prices dropped almost 2% in the latter part of 2023 but remain well above historical norms.

One key factor that could further push down used car prices in 2024 is the oversupply of off-lease vehicles. As more leased vehicles come off their terms, the influx of these late-model used cars could create an oversupply situation, putting downward pressure on prices. Analysts expect this oversupply to gradually bring used car prices down further throughout 2024, though not in a dramatic fashion.

While the used car market is unlikely to see the steep price drops witnessed during the 2008 financial crisis, industry experts project a gradual decline in prices as the economic climate stabilizes. However, the extent of the price decreases will vary based on factors such as vehicle age, condition, and demand for specific models.

 

Dealership Incentives and Negotiation Leverage

As the recession takes its toll on consumer demand, automakers are offering more incentives and discounts to move inventory off dealer lots. New 2023 model year vehicles in particular are seeing increased cash rebates and attractive financing deals like 0% interest to lure buyers.

Dealers have also become more willing to negotiate below the manufacturer’s suggested retail price (MSRP) as sales volumes slow. While a few years ago it was nearly impossible to score a discount on hot new models, the buyer’s leverage has improved. Savvy shoppers may be able to negotiate 5-10% or more off MSRP on certain makes and models, especially if paying cash.

However, those looking to finance their purchase will still face higher interest rates and tighter lending standards from banks. The most lucrative discounts and incentives tend to favor customers able to pay in cash or qualify for low promotional APR offers from captive lenders like Ford Credit or Honda Finance.

Leasing has also become a more popular option again as monthly payments remain lower than financing. But buyers need to scrutinize the mileage limits and excess wear terms to avoid potential fees at lease-end.

 

Best Time to Buy a Vehicle in 2024

While car prices may not plummet dramatically in Canada’s 2024 recession, savvy shoppers can still find opportunities to score a better deal by timing their purchase strategically. Historically, the spring and summer months tend to be an ideal window for buyers to negotiate favourable pricing from dealerships.

As the weather warms up, dealerships are motivated to clear out remaining inventory from the previous model year to make room for the newer stock arriving on lots. This sense of urgency often translates into more generous cash rebates, low-interest financing incentives, and a willingness to accept lower offers from buyers.

The months of April through June are typically the sweet spot, as salespeople aim to hit their quarterly targets by unloading 2023 models before the next round of vehicles arrive. Shoppers may find dealerships more open to negotiations and larger discounts off the manufacturer’s suggested retail price (MSRP) during this period.

For those considering leasing a vehicle instead of financing, timing is equally crucial. Most manufacturers roll out their latest leasing programs and incentives in the summer months, making June through August an opportune moment to secure an attractive lease deal on a brand-new model.

However, it’s essential to scrutinize the fine print carefully, as some leases may include mileage limitations or excess wear-and-tear penalties that could negate the upfront savings over the lease term. Buyers able to pay cash or qualify for low-interest financing options may have more leverage in extracting the best possible pricing from retailers eager to move units.

 

Consumer Demand and Economic Headwinds

The combination of high inflation and rising interest rates has put immense financial pressure on Canadian households. With the cost of essentials like food and housing skyrocketing, many consumers have seen their disposable incomes shrink substantially. This erosion of purchasing power has directly impacted big-ticket purchases like vehicles.

Consumer confidence levels plunged in late 2023 and early 2024 as economic conditions deteriorated. A recent survey by the Canadian Automobile Dealers Association (CADA) found that over 30% of respondents have postponed plans to buy or lease a new vehicle due to the high costs. Even among those still intending to purchase, many have scaled back their budgets and are opting for more affordable options.

The elevated interest rate environment has further dampened demand, particularly for those requiring financing or leasing. With borrowing costs at multi-year highs, monthly payments on auto loans have surged, pricing many buyers out of the market entirely. Lenders have also tightened their approval criteria, making it tougher to qualify for loans.

As economic headwinds intensify, industry experts predict that new vehicle sales could decline by 10-15% in 2024 compared to the previous year. This softening demand is expected to create opportunities for those still looking to purchase, as automakers and dealers get more aggressive with incentives and pricing to move inventory.

 

Market Outlook vs the 2008 Financial Crisis

While some car buyers may be hoping for a repeat of the major price drops seen during the 2008 global financial crisis, most industry experts agree the dynamics of Canada’s 2024 recession are quite different. A decade and a half ago, the automotive market was plagued by a severe credit crunch that made vehicle loans extremely difficult to obtain for many consumers. This caused demand to plummet, forcing automakers to deeply discount their vehicles.

The situation today is characterized more by economic uncertainty and reduced consumer confidence rather than a systemic credit crisis. While higher interest rates are making auto loans more expensive, most banks are still willing to lend to qualified buyers. On the supply side, inventory levels have recovered from the pandemic-related shortages but are still relatively tight for in-demand models.

As a result, analysts expect a gradual softening of prices rather than the steep discounts of 2008-2009. Oversupply is less of a concern, and automakers can be more strategic with incentives and production cuts to prevent a fire sale on inventory. The pre-owned market in particular is forecast to see steadily declining prices after spiking to record highs, but not a pricing freefall.

 

Vehicle Segments Impacted Differently

While the overall Canadian auto market is expected to see increased discounts and negotiating power for buyers during the 2024 recession, not all vehicle segments will be impacted equally. Certain vehicle types may see steeper price drops while others remain relatively insulated based on supply and demand dynamics.

Pickup trucks and large SUVs, which have been hugely popular with Canadian consumers, are likely to experience more moderate discounts compared to smaller vehicles. The demand for these larger vehicles has remained robust, and automakers have been able to command premium pricing. However, rising fuel and operating costs during the recession could dampen demand slightly, leading to modest incentives from manufacturers.

Conversely, compact and midsize sedans may see more significant price drops as consumer preferences continue to shift away from these traditional car segments. With lower demand and higher inventory levels, dealers will likely be more motivated to clear out sedan inventory with more aggressive cash rebates and discounting.

The luxury vehicle segment is anticipated to be one of the most resilient, with prices largely holding firm during the economic downturn. Affluent buyers who can afford high-end models are typically less impacted by recessionary pressures. However, ultra-premium brands may need to offer modest incentives or reduced pricing on higher-inventory models to sustain sales volumes.

Electric vehicles (EVs) could also buck the downward pricing trend, at least in the short term. With sustained government incentives, relatively low operating costs, and insulated demand from eco-conscious buyers, EV prices may only see minor fluctuations. However, if the recession significantly impacts household budgets, more substantial discounts on mainstream EVs could emerge to stimulate sales.

 

Ongoing Supply Chain and Production Constraints

While new vehicle inventory levels have rebounded from the lows of 2021-2022, automakers are still grappling with lingering supply chain constraints that could prevent bigger discounts or price drops on new models. The semiconductor chip shortage that crippled production is mostly resolved, but other raw material shortages and supply disruptions remain.

Many major automakers have announced production cuts in 2024 as economic conditions weaken and demand softens. Ford, GM, Toyota, and others have temporarily idled some plants or slowed manufacturing output. This supply restriction could keep pricing firm on their most popular and profitable models.

Additionally, the transition to electric vehicles is straining supply chains for battery materials and components. Tight inventories of EVs, hybrids, and fuel-efficient vehicles could maintain higher pricing premiums in those segments. Buyers seeking deals may need to focus on less in-demand gasoline models or previous model years.

Ongoing logistics challenges like rail disruptions and port bottlenecks also threaten to constrain inventory pipelines. So while oversupply is driving down sticker prices, automakers have some ability to manage discounts and production volumes to stabilize pricing to an extent.

 

Dealing with Interest Rates and Financing Challenges

While lower car prices are an advantage in a recession, buyers also need to consider the rising cost of financing a vehicle purchase. As the Bank of Canada raises interest rates to curb inflation, auto loan rates have climbed to levels not seen in over a decade. This makes locking in a lower interest rate crucial for minimizing the overall cost of buying a car during the 2024 downturn.

Buyers able to secure financing at rates below 5% before the recession fully sets in will be in a better position long-term. Those waiting may face higher rates in the 7-9% range as lenders tighten approval criteria and make borrowing for big-ticket items like vehicles more difficult amid economic uncertainty.

Another factor is longer loan terms becoming harder to qualify for. Stretching out payments over 84 months used to be commonplace, but lenders are likely to restrict terms to 60 months or less during a recession to reduce risk. This increases monthly payments but lowers overall interest paid.

Down payments and trade-in values are other considerations. Lenders generally prefer higher down payments of 10-20% to approve loans and offer the best rates. However, used car trade-in values could decline in 2024 if the market is flooded with supply from rental companies and leases coming off the road.

 

Pros and Cons of Buying in a Recession

Weighing the pros and cons of purchasing a vehicle during a recession is crucial. On the plus side, buyers can often take advantage of increased inventory levels and generous discounts from dealers eager to move units. With an influx of supply, shoppers have more choices and negotiating power.

However, the economic uncertainty and potential job insecurity that come with a recession are significant drawbacks. Many consumers may hesitate to take on a major financial commitment like a car loan or lease during turbulent times. There are also risks that vehicle values could depreciate more rapidly if the economy worsens.

Ultimately, the decision depends on individual financial circumstances and risk tolerance. Those with secure employment and manageable debt levels may find a recession is an opportune time to strike a deal on their next car or truck. But those with precarious jobs or stretched budgets may want to wait out the downturn.

 

How Long Will the Buyer’s Market Last?

The duration of favorable buying conditions for car shoppers in Canada will largely depend on the severity and length of the economic downturn. Most forecasts point to a relatively mild and short-lived recession in 2024, which could limit the buyer’s market to a window of 6-12 months.

However, if high inflation persists and the Bank of Canada continues raising interest rates aggressively, leading to a more protracted recession, the scales could tip further in favor of buyers for an extended period of 12-24 months or longer. An elongated slump in consumer demand and spending would force automakers and dealers to sustain incentives and discounts to clear inventory.

Conversely, if the economy begins rebounding sooner than anticipated in late 2024 or early 2025, pent-up demand from sidelined buyers could quickly erode the buyer’s leverage. Analysts caution that any favorable pricing and abundant inventory is likely a short-term reprieve before the market reverts to pre-recession tightness.

Ultimately, buyers seeking to capitalize on a buyer’s market should aim to make their purchase sooner rather than later. Waiting too long risks missing the window as economic conditions improve and competition among buyers heats up once again, erasing negotiating power and pricing advantages.

 

Strategies for Getting the Best Deal

While Canada’s 2024 recession won’t lead to the dramatic drops in car prices seen during the 2008 global financial crisis, buyers can still leverage the shifting market dynamics to negotiate better deals. Here are some strategies to consider:

 

Negotiation Tactics

With more inventory to move, dealers may be more open to negotiation on prices. Don’t simply accept the initial offer – research prices thoroughly and be prepared to walk away if the numbers don’t work for you. Having pre-approved financing from your bank can also strengthen your negotiating position.

 

Timing Your Purchase

Late spring and early summer are typically the best times to buy as dealerships aim to clear out remaining inventory from the previous model year. Dealers will be more motivated to make deals. However, if you need a vehicle sooner, monitor incentives and pricing regularly for opportunities.

 

Getting Pre-Approved for Financing

Getting pre-approved for an auto loan from your bank or credit union puts you in a stronger bargaining position at the dealership. You can compare rates and terms transparently, and won’t be beholden to whatever financing the dealer can arrange. In a recession, this also protects you if lending standards tighten.

 

Considering the Full Costs of Ownership

While negotiating the best possible purchase price is important, remember to factor in other ownership costs like insurance, fuel, maintenance and repairs over the vehicle’s lifetime. A slightly higher price on a more reliable, fuel-efficient model could pay off in the long run versus opting for the absolute lowest sticker price.

 

Conclusion – Will Car Prices Significantly Drop?

While Canada’s 2024 recession won’t lead to the dramatic drops in car prices seen during the 2008 global financial crisis, buyers are starting to regain some negotiation leverage as inventory levels rise and sales slow. However, average new and used car prices likely won’t return to pre-pandemic levels in the near term.

Savvy shoppers who can secure financing may be able to negotiate significant discounts, especially on 2023 models as dealerships aim to clear inventory. Late spring typically offers the best deals as automakers ramp up incentives and rebates. But those looking for luxury or in-demand vehicles shouldn’t expect major price cuts.

The overall advice for buyers in 2024 is to do your research, get pre-approved financing, and be prepared to act quickly when incentives are available. While not a return to “fire sale” prices, the market has shifted enough that those able to buy can likely get a fair deal by being patient and negotiating firmly.

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Questions About Car Prices Droping in a Recession

Car prices in Canada do tend to drop during a recession, but not always significantly. In the 2008 recession, both new and used car prices saw notable declines as demand fell sharply. In the 2020 pandemic recession, used car prices rose due to low inventory, while new car discounts grew to spur demand. In the current 2023 recession, experts predict gradual price drops in 2024 as supply chain issues ease and interest rates cool demand. However, prices are not expected to fall dramatically.

During the 2008 recession in Canada, new vehicle sales dropped 12.7% from 2007 and used vehicle sales declined 3.1%. With unemployment rising and incomes falling, fewer Canadians were in the market for vehicles. This allowed dealers to offer substantial discounts to attract buyers. In 2009, incentives on new vehicles reached record highs over $5,000 per unit on average, bringing transaction prices down. Used car prices also declined in 2008 and 2009 as demand softened. Overall, Canadian car buyers saw notable savings during the 2008 recession.

Unlike the 2008 recession, used car prices in Canada rose significantly during the 2020 pandemic downturn due to low inventory. With factories shutting down for months early in the pandemic, the supply of new vehicles shrank drastically. This increased demand for used cars, sending prices up over 30% in some market segments. However, new car discounts grew in 2020, with some brands offering 0% financing for up to 84 months. So the impacts were mixed – used car prices rose while new car deals emerged.

Yes, experts are forecasting a gradual decline in Canadian car prices by late 2024 as the current recession continues. New vehicle inventory is already growing significantly, topping 180,000 units in early 2023 compared to below 30,000 at the start of 2022. This influx of supply will allow discounts to return, with analysts projecting new car price drops of 5% by the end of 2024. Used car prices are also expected to decrease slightly in 2024 as rising interest rates and inflation cool buyer demand. But dramatic, pandemic-level price drops are unlikely.

Three primary factors indicate car prices will moderate in Canada during the ongoing 2023 recession:

 

  1. Improving new vehicle inventory as supply chain issues ease
  2. Rising interest rates slowing auto loan demand
  3. High inflation and economic uncertainty reducing consumer willingness to spend

 

As inventory rebounds and buyer demand faces headwinds from rates and inflation, pricing pressure should gradually subside. While the market likely won’t return to pre-pandemic norms soon, relief appears on the horizon.



If the Bank of Canada does begin cutting interest rates aggressively to spur economic growth later in 2023 or 2024, it could halt the expected cooling of car prices. Lower interest rates stimulate lending and increase affordability for large purchases like vehicles. If a swell of pent-up demand returns with lower rates, it could quickly tilt supply and demand balances back towards sellers. This could cause new price jumps, especially in the used market where inventory can’t be increased as easily. It’s an important risk for buyers to monitor if considering waiting for lower prices.

High-end luxury vehicles and full-size pickup trucks could experience the most dramatic price drops in Canada during the recession. These expensive vehicle segments saw some of the largest price surges during pandemic supply shortages. As high inflation eats into incomes for affluent buyers and business investment slows, demand is already weakening in the luxury and truck markets. This should force manufacturers to reinstate big discounts if they hope to maintain sales volumes. Mainstream brands and economy cars are less likely to post major price declines.

Due to still limited inventory, used electric car prices are not expected to fall by the same degree as gas-powered vehicles in the 2023 recession. Even with new EV supply improving, demand remains exceptionally strong for used plug-in models from brands like Tesla and Nissan Leaf. The supply-demand imbalance for pre-owned EVs could result in their value premiums holding steadier through 2023 and 2024 versus comparable gas-powered cars. However, Canada’s maturing EV market should see calmer pricing down the road.

Yes, the 2023 recession could accelerate the recent trend of buyers favoring used over new vehicles to get more value. With experts predicting steeper price drops in the used market, the savings over new could become more substantial. This may convince more budget-focused Canadians to go pre-owned as they postpone big purchases until economic certainty returns. That said, new car discounts should also improve, keeping both markets competitive depending on individual needs.

Auto experts advise the following tips for Canadian consumers looking maximize savings on vehicle purchases during the current economic downturn:

 

– Consider buying used instead of new to avoid steepest depreciation

– Compare trim levels to find a model with necessities but fewer bells & whistles

– Look at higher mileage pre-owned cars that may have already taken the depreciation hit

– Check rates from multiple lenders to find the best financing deal

– Time purchase later in 2023/2024 when discounts and used car supply may increase further

– Avoid overextending budget or financing term, even if payments are lower

It’s possible the recession drives more consumers to lease rather than buy used cars. Leasing often allows drivers to get a newer, more reliable used vehicle for lower monthly payments versus financing a purchase. This can be especially appealing for budget-focused buyers. If used car price drops end up lagging new vehicles, leasing may also mitigate some lingering overvaluation. More Canadians leasing pre-owned could help stabilize used prices during the downturn.

Yes, industry analysts expect smaller SUV and crossover models to continue retaining value better than comparably priced sedans during the recession. Despite high gas prices, Canadian consumers have kept buying small SUVs/CUVs in recent years while abandoning traditional cars. This ongoing demand imbalance with ample buyers but constrained inventory should preserve stronger resale and trade-in value for compact SUVs. Only a major shift back to sedans could change the value equation.

Vehicle segments and models projected to offer buyers some of the best discounts and deals in Canada during 2023 include:

 

– Full-size pickup trucks like Ford F-150, RAM 1500, Chevrolet Silverado

– Luxury SUVs including BMW X5, Audi Q7, Mercedes GLE

– Midsize family sedans like Toyota Camry, Honda Accord

– Compact hatchbacks such as VW Golf, Hyundai Elantra GT

– Minivans including Dodge Grand Caravan, Toyota Sienna

 

Shoppers looking for maximum savings will want to keep an eye on high inventory models like these where automakers and dealers have more pricing flexibility.

Surging gasoline prices have sparked more consumer interest in electric vehicles (EVs) in Canada. But with EV supply still constrained, discounts aren’t appearing yet. However, if gas prices stay over $2 per liter for an extended period, it may drive enough added EV demand for manufacturers to increase incentives. This could translate to deals like cash rebates or reduced financing rates to attract buyers on the fence. So the potential exists for high gas prices to unlock EV discounts, but the market dynamics aren’t quite there yet.

Some risks that could alter expectations of cooling Canadian car prices over 2023/2024 include:

 

– Supply chain problems re-emerging, slowing vehicle production

– Russia-Ukraine conflict elevating commodity prices, production costs

– Bank of Canada cutting interest rates too quickly, stimulating demand

– Pent-up savings driving stronger-than-expected spending by consumers

– Younger demographics bolstering appetite for used vehicle ownership

 

If consumer demand accelerates again or inventory growth stalls, it could put upward pressure back on car pricing. The market likely faces a bumpy road back to normalcy.

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