Luxury vehicle sales booming as wealth effect spurs Canadians to buy costlier cars

Canadians may be buying "too much car" and getting in over their heads, as sales of luxury vehicles are booming.

In a recent note, BMO economist Alex Koustas calculated that sales of cars with a sticker price over $90,000 have increased by 37 per cent since 2013.

And he says that educated guess might be on the low side, since it doesn't include models where the base price is below that threshold, but quickly pushes over it when options such as heated steering wheels, all-leather interiorsand someself-driving functions are added.

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"Using these figures," Koustas said, "the upper-upper-crust" of the auto market now makes up more than one per cent of the overall vehicle market. That's well above the ratio seen in previous cycles.

Sales numbers from some high-end marques back that up.

According to independent auto analyst Dennis Desrosiers, higher-end cars are flying out of the showroom. Audi sales were up more than 14 per cent in the first eight months of the year, compared with 2015. BMW is up by more than eight per cent over the same period.

Mercedes-Benz sales are up by more than seven per cent, and Porsche is up by almost the same amount.

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The trend isn't necessarilynew, though. Scotiabankeconomist Carlos Gomes took a deep dive into the segment last summer.

"Rising wealth has also enabled many Canadians to shift beyond the entry-level luxury segment which accounted for much of the growth," he wrote in a note to clients at the time, noting that luxury vehicle sales were up by 12 per cent in 2015 compared to the previous year's level.

Much of the gain is coming from baby boomers, Gomes said, but underpinning those purchases is the so-called "wealth effect." That's the term economists use for when households feel wealthier simply because the value of their assets read: their houses has increased, prompting them to think they can afford to spend more even if their incomes are not rising by as much.

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"With significant house priceappreciation," Gomes said in a telephone interview Thursday, "wealth is going up [and]that's driving a lot of this."

If Canadians are financing their fancy cars with cash on hand, then the downside may be limited. But if they're signing up for ultra-long auto loans the way we know they are on the lower end of the market, there will be a financial reckoning if and when interest rates rise.

"Anecdotal evidence suggests that an inflow of foreign money is fuelling the sales growth," Koustas says. "But we've long argued that a growing share of Canadians are buying 'too much car'."

"Neither case is an ideal scenario," he said.