Auto sales to dip in most provinces, led by Ontario's 3.1% drop, Scotiabank says

Canadian sales of cars and light trucks this year are expected to dip from last year's all-time high, mostly because of weaker economic conditions in Ontario, Scotiabank said Friday in a report.

The bank's automotive outlook projected that 2018 could end a five-year string of successive records that included 2.04 million vehicles sold in 2017 largely fuelled by demand in Ontario as well as a revival in Prairie provinces last year as they overcame the oil-price crisis.

Scotiabank doesn't forecast much of a pullback this year about 40,000 vehicles.

But the bank expects Ontario which has been the major driver behind recent growth will put the brakes to Canadian auto sales this year, accounting for about two-thirds of the national sales decline.

Ontario's purchases will "ease off" partly because a softer real estate market in the province will erode use of home equity loans to purchase vehicles, Scotiabank economist Carlos Gomes said in an interview.

"Not that it's going to be a big decline," Gomes said.

He added that 2017's record sales level was also fuelled by double-digit growth in the Prairie provinces "and you're not going to get that same strength the way you did last year."

Scotiabank said vehicle affordability is another issue affecting Canadian sales although there are many factors at work, including the trickle-down effect of a weaker Canadian dollar and the high level of Canadian household debt.

Canadian personal disposable income was growing faster than Canadian new vehicle prices for several years but that changed in 2016 when the Canadian dollar weakened with the price of crude oil.

"That tells you that affordability is beginning to be squeezed, which wasn't the case previously," Gomes said.

TD economist Dina Ignjatovic said another force at work is the availability of vehicles with new technologies.

"If you go to a dealership and you buy a new vehicle, you can get a base model or you can add on the technology package, which is going to increase the cost," Ignjatovic said.

The high level of Canadian household debt is also "one of the issues that we are watching and the Bank of Canada is watching because it is elevated and, as interest rates rise, it is going to start to hit consumers."

But it's not a one-way street, since it's possible to stretch out lease or finance payments over more months and dealers may increase incentives if sales volumes soften, Ignjatovic said.

In addition, she added, the revival in vehicle leasing in recent years has resulted in more returns, providing more options for people who can't afford a new car.