All the car dealers in our town have spent millions over the past few years building out massive showrooms and car lots stacked to the brim with inventory. Even the used car lots have been growing like wildfire. That’s what a consumer credit bubble will do for you. The next bit is not so pleasant… See: Lust turns to rust: why Canada’s love for cars won’t end well
In case you haven’t noticed, the Canadian economy isn’t doing so well… Both wage growth and job growth have been deeply underwhelming. And yet Canadian vehicle sales are growing at the fastest rate in years. Nor are Canadians settling for ultra-cheap models like the sub-$10,000 Mitsubishi Mirage. Canadians want big (the ratio of truck sales to passenger cars, at nearly two-to-one, is the highest ever) and pricey (five luxury brands combined—BMW, Mercedes, Audi, Porsche and Lexus—now sell half as many cars as Canada’s top selling car company, the decidedly mass-market General Motors).
What gives, you ask? Chalk it up to that great Canadian equalizer—debt. Since 2008 auto loans from the Canadian banks have grown at an annual compound growth rate of 21 per cent, hitting $72 billion as of the end of last year. To keep ever more cars and trucks moving off dealer lots, the car companies have increasingly turned to ridiculously long amortization periods of up to 96 months. A report by the Moody’s debt rating agency last year noted that some car buyers even wind up borrowing 135 per cent of the value of the vehicle. That’s a sign of desperation. So too is the fact that one-quarter of all auto loans are to people with lousy credit. That’s what they call subprime lending, folks. You might have heard of it before.