The most surprising event of the North America business recovery is the robust auto market. It is booming despite high unemployment and a generally sluggish economic upswing. The year overall car sales are climbing nearly 10 per cent in parts of Canada, and the story is similar in the United States.
What is pushing up demand, and will it be sustained? There are a host of reasons. Certainly, the most important factor is the availability of cheap money. Overall interest rates are at record lows, so the cost of financing a car purchase has fallen dramatically. Lenders have been willing to stretch out car loans to eight years in order to keep down the payments: they could be as little as $100 a month, the price perhaps of a family dinner at a restaurant. Loans formerly were extended for about three years, but to facilitate car buying, that has been expanded to almost the life of the car.
Even the low payments already are adding to the high level of consumer debt, so there will be a day of reckoning. Clearly, the industry is borrowing from the next couple of year’s demand, a kind of “after me the deluge” thinking.
Consumers have put off buying a new car because of business recession, so that the average age of cars on the record is 11 years, about the life expectancy of the car. Hence, there is a shortage of used cars, so many motorists have had to acquire a new car, entailing a cyclical recovery in car sales. The replacement demand explains much of the strong booming car market.
Then to fuel the market, the industry has develop a record of 70 new or updated models compared to a yearly average of about 45. Furthermore, those designs are much more efficient, a good selling point. Whether or not a new car can obtain as much as 45 miles per gallon as widely advertised is questionable.
If these factors were not enough, many dealers currently offer manufacturer-subsidized cash incentives for less popular makes or for large trucks. Despite the exuberant car sales, it should be recognized that the industry is coming to a secular downturn. The introduction of new models used to be a major attraction, awaited eagerly by young and old. Youngsters to an increasing extent are not interested in cars as was the case in previous generations. Also, with the move to urbanization, there is a less need for cars. Too, many are resorting to the shared economy, borrowing vehicles for a brief period. In various parts of the globe the cost of maintaining a car is prohibitive. In Singapore, for instance, auto sales are plummeting as charges have soared. For many reasons a secular decline in car sales will occur; in Europe the market is approaching saturation.
One can anticipate a cyclical and secular decline in demand for cars will take place, but that probably is not imminent.