New car prices expected to fall this year. But will inflation weary Canadians have the cash to buy?

Canadians looking to buy a new car this year will find some relief at dealerships, according to DBRS Morningstar. The credit rating agency's “2024 Global Automotive Outlook,” report said it expects car prices to fall and selection to return to “more normal levels” this year, as the sector continues to recover from a supply chain crisis that led to a global semiconductor microchip shortage.

However, that doesn’t mean inflation weary Canadians will be jumping in. Part of the reason prices are recovering is that pent up demand for cars is also slowing in the face of higher interest rates and stubborn inflation, the report said. “Certainly, the consumer will have more choice than in the immediate prior years,” Robert Streda, senior vice president at DBRS Morningstar and co author of the report, told the Star.

“Pricing was still firm in 2023. I think the consumer, to be honest, was a bit more resilient relative to consensus expectations,” he added. "Given the higher rates, and again, the ongoing improvement in vehicle supplies, we certainly do expect some softening in pricing this year." The , a gain of almost 20 per cent over the last year, according to data compiled by .

(Autotrader data reflects average prices of car listings on its website, which may differ from the manufacturer’s suggested retail price (MSRP) and does not include financing costs, incentives, discounts, or government subsidies.) Meanwhile, automakers prioritized the allocation of available microchips toward higher margin vehicles, restricting the product mix in the market in the last few years.

According to the Autotrader report, 1.3 million fewer cars were sold between 2020 and 2022 than in previous two year periods. As a result, . Streda does not believe prices will revert to pre pandemic levels just yet. Inflationary pressures remain, he said, including the outcomes of . The new collective agreements include wage increases of 25 per cent though April 2028.

As a result, higher labour costs are estimated to translate into an increase of $500 (U.S.) per vehicle, which will likely be passed on entirely, or in part, to the consumer, Streda said. As prices and demand normalize, DBRS is also predicting weaker earnings across the auto sector. In Canada, industry sales were about 1.7 million units in 2023, according to Streda.

He expects only a slight uptick to 1.8 million units this year, he added. “As far as the pent up demand, from our perspective, I see that being exhausted at some point in 2024.”.