Depending on who you ask, we’re either in the middle of an auto bubble in Canada, or we’re not. Let’s look at some of the determining factors to see whether or not the auto industry in Canada is a candidate for a bubble.
Factors That Could Create an Auto Bubble
The perfect storm must arise in order for an auto bubble to be created. Here are just a few of the big picture items:
A Large Auto Industry: You can definitely check off this box! The auto industry is huge, and the used car industry is even bigger. Because of the recent growth, they’ve reached levels that have never been seen before, which leads many to believe that a bubble is inevitable—if we aren’t already in one.
Too Much Bad Debt: The easier it is to get an auto loan, the more likely it is that bad debt is being created. More and more consumers will start defaulting on their auto loans at some point. Combine that with a depreciation in car values, and a pretty bad situation may arise with more and more people having negative equity.
A Change in Interest Rates: On a more macro level, if the interest rates are raised, fewer people will be enticed into buying a car, either used or new. If there are fewer buyers and more cars to purchase, there could be an issue with a much higher supply than there is demand.
They’ve Been Predicting a Bubble for Years
As far back as 2015, experts have been saying that the Canadian auto market is due for some sort of correction. But year after year, car sales keep going up, so the date of when it is supposed to happen keeps getting pushed forward. Even the most recent car data suggests that car sales are continuing to flourish, so if there is a bubble, it doesn’t seem to be ready to burst just yet.
Car Sales Keep Surging
As long as car sales keep increasing, it’s hard to say the bubble has burst, but it could mean that the bubble is just getting bigger and bigger—with an impending collapse. Keep your eye out for a steep decline in car sales. This could indicate the start of the bubble bursting, as car inventory starts piling up and fewer and fewer consumers feel the need to buy a car.
Lessons from the U.S. Housing Bubble
The U.S. housing bubble was a shock to many Americans because they didn’t have a solid idea as to why it was happening. Everyone always thought real estate was a solid investment and that it would always go up in value.
Here’s one lesson to learn from this: No market is invincible to a downturn. If car prices are higher than they should be, and people stop buying them because they are too expensive or they already have too much debt, there could end up being far too many cars than there are buyers.
Is There a U.S. Auto Bubble? – Many say yes! And if it bursts, it could have a domino effect on the Canadian auto market. Both markets have enjoyed unparalleled success in recent years, so it only makes sense that a change in one could trigger a change in the other.
What Will Happen If the Bubble Bursts?
If car values plummet, thousands will suddenly be upside down in their car loan. The used car market would take the hardest hit because those values are the ones that would likely fall the fastest.
It is difficult to argue with the value that a new car holds; after all, it’s brand new. But with a used car, there is a lot more gray area that can be a source of contention. It could become very confusing to try to determine a car’s value when an industry is experiencing turmoil.
Take a breath! For now, this is all Chicken Little talk. The sky is not falling, may never fall, and if it does fall, we’ll all just move on from there.
We’ll Always Be Here
You can always count on Ride Time to be there for you, regardless of whether there’s a bubble, if it bursts, or if it just keeps growing. Stop in today and see our wide variety of used cars, all with a 158-point inspection!