It is sustainable

Precise data is not available, but it appears that a generation ago, few automobiles were purchased on the installment plan – approximately only 40 per cent.

Nowadays most would consider that a relic of the prehistoric age, as few use cash. According to the Canadian Automobile Dealers association 90% use a deferred payment plan. That trend has been carried beyond any reasonable limit.

The low-interest car loans are a major factor in spurring sales to advance in a parabolic fashion, similar to the housing bubble in the preceding decade.

At the end of last year Canadian car sales amounted to 1.67 million new vehicles, far beyond nearly all forecasts, and far above what economist inferred they should be.

Looking at the total picture there was every reason to anticipate a rebound from the 2011 level, given that the average age of cars on the road was 11 years, compared to eight years before the recession, but few expected such a strong recovery.

There are several reasons for this surge, in part due to eight-year interest-free loans offered by some automobile companies. The extended duration prompted concerns expressed by Finance Minister Jim Flaherty, who worried that inevitably higher interest rates will entail trouble later on.

The automobile industry is fighting to boost loans for car sales, abetted by banks desirous of putting their reserves to work. Automobile debt has been increasing at an annual rate of about 9%, compared to 6% from year earlier levels.

J.D. Power Associates, a consulting firm, stated that car companies are motivated by an effort to make payments as low as possible. Nowadays, most consumers are taking out loans for six years or longer.

Clearly, stretching remittance schedules lowers monthly payments, luring customers to buy new vehicles that in the long run will be a burden and affect all retail sales.

Any objective observer would acknowledge that some of these buyers will return to invest in a new car while still owing money on the vehicle that is being traded in for a replacement. Is this sustainable when consumer debt already is so leveraged?

Automobile companies now are emphasizing leasing as a way to boost sales, an expensive route for consumers.

General Motors Canada among others now offers zero down, zero security deposits, no first down payment, and for the first time, zero money due at signing the lease for the less popular models.

Are these appropriate ways to underpin the automobile sector? Any reasonable commentator would disapprove of these steps.



Bruce Whitestone