Luxury vehicle sales in Canada still booming but higher interest rates could pose challenge

JasTakharison the hunt fora new luxury car.

The Toronto real estate agenthas been renting cars since the lease on his vehicle expired two months ago so he can take his time to pick the right brand.

The 36-year-old car enthusiast saidhe'sbeen eagerly awaiting next week'sToronto auto showto help himdecide.

"I'll spend a day there and see the four-five cars that are flirting around in my head," Takharsaid. "And then I'll go to a dealership,test drive them and get it."

With a budget of$95,000, he'sconsidering brands like Audi, BMW, Lexus and Mercedes-Benz.

Takhar is one of manyCanadians who are spending more togo upmarketinto the luxury car segment.

Analysts saida combination of a strong economy with goodjob growth, affordable financing and more new vehicleson the markethas led the luxury segment tooutpace salesgrowth inthe overall auto sector in recent years.

Record sales

"It's not a huge piece of the overall market, but it has beengrowing more rapidly than overall vehicle sales, whichof course on the whole,has been setting records for five consecutive years now," said Michael Hatch, chief economist at the Canadian Automobile Dealers Association (CADA).

For the first time ever, car sales in Canada reacheda record 2.04 million units last year. That isa4.6 per cent increase from 2016,which placesCanada third among G7 countries for sales growth.

Luxury vehicles accounted for almost 12 per cent of 2017 sales in Canada, up from 11 per cent in 2016 and nineper cent in2013, according to Scotiabank.

Analysts expect strong sales of luxury cars to continueandgain more market share as growth in the overall car market stabilizes.

"If overall sales are flat this year, it will still be good growth on the luxury side," Hatch said.

Scotiabankestimates overall car sales of 2.0 million in 2018. While a forecast for the luxury market wasn't available from Scotiabank,new luxury sales is forecast byDesrosiersAutomotive Consultantsto climb 7 per centin 2018.

Strong economy

Paul Cummings, CEO of Grand Touring Automobiles in Toronto, said"super luxury" brands like Bentley, Lamborghini andRolls-Royce sawover 10 per cent sales growthat his luxury dealership last year and he expects this to continue with a strong economy.

"First, it appears that the Canadian economy willcontinue to grow;second, our manufacturershave new product offerings arriving this year; and third, we have invested in new facilities that will provide greater accessibility/capacity to our customers," he said.

With Canada's economy expected to grow2.3 per cent this year, global luxury automakers are continuing to roll out new models and brands in the country.

Some notable ones includethe world's bestselling luxury carmaker Mercedes-Benzexpanding its lineup to introduce the A-Class hatchback this year, while Italian brand Maserati will rollout its entire 2018 all-wheel-drivelineup after seeing an 80 per cent jump in sales in Canada last year.

Higher rates could hurt luxury market

But even with a booming luxury car market, analysts warnthat one of the biggest challenges facing the sector is the prospect of higher interest rates.

Hatch of CADAsaid the luxury side of the market hadbeen more insulated from some negative economic shocks that have occurred because at the super high end of the market, consumers can still afford to pay higherborrowing costs.

"But, it's possible that fewer people will be in a position to move upmarket in a higher rate environment," he added.

Cummings, meanwhile,expectssales at his dealershipto be affected by higherrates asmanufacturers and banks keep aneye on the level of consumer debt.

"If the cost of [borrowing] money goes up and you finance or lease your car, typically the payment will move up as well," he said.

'I've budgeted for a hike'

Canadian household debt as a share of disposable income hit a record high in the third quarter of 2017, according to data fromStatistics Canada. Canadians owe$1.71 for every dollar of disposable income they had in the third quarter.

Economists have warned thatconsumers could run into trouble as interest rates rise.

But that won't deterTakharfrombuying hisluxury car as early as this month.

"I've budgeted for a hike in rates," the father of twosaid.

"I won't be silly and go get an AstonMartin at $250,000or a Ferrari or Lamborghini," he said. "If I can keep it to$1,000 to $1,100 a month for a lease, I'm happy."