Buying a new car before a recession – is it a good idea?

There is a recession looming in most countries at the moment. Ignorance is not always bliss, though. Many people still need to determine whether or not a recession is imminent or has already begun.

No matter how you define it, most of us struggle with our bank accounts. An increase in inflation and the possibility of buying cars during recession will have an adverse effect on all aspects of the economy.

On the flip side, buying car during recession costs an average of $48,000 to purchase an all-new car, including the purchase price.

However, the recession in 2023 may be different from previous recessions, and there may be a change in car prices during a recession compared to previous recessions.

Check out this blog to determine whether you should consider buying a new car before a recession occurs.

Recessions: What Are They and How Do They Affect Prices? 

An economic recession occurs when economic activity declines for over two consecutive quarters. The gross domestic product can lend insight into this situation.

Many companies reduce their hiring and lay off some employees when a recession occurs. This results in an increase in unemployment and a decrease in disposable income for many people. Since fewer people are able to afford to purchase goods and services, the price of many goods and services decreases.

When disposable income declines, essentials like food and utilities remain the same, while travel and entertainment become more affordable as wants rather than necessities.

Things that cause a recession

There are lots of reasons why an economy can go into recession. Here are a few:

• An unexpected economic event

A recent example of an unexpected economic shock is the COVID-19 pandemic in 2020, which resulted in a short but deep recession.

• The asset bubble burst

The burst of asset bubbles is another factor that contributes to economic recessions. Investors who make rash decisions may face this problem.

For example, many people purchase shares and property, expecting the prices to rise substantially. However, panic selling and market crashes result in a recession when the economy weakens.

• Technological advancements

It is no secret that technology constantly changes how people live and work. The industrial revolution created automated processes that eliminated entire professions in the 19th century, forcing people to adapt and leading to new professions.

• Inflation
  As prime interest rates rise to limit unsustainable economic growth, inflation becomes uncontrollable. This leads to a recession.
• Deflation
  Inflation and deflation are not mutually exclusive. Deflation leads to lower prices, lower wages, and slower spending, which results in increased car prices during recession.
  

• An elevated unemployment rate
  A high unemployment rate indicates that a country is experiencing a recession. The labour market plays a crucial role in the economic development of a country. Moreover, unemployment has increased, contributing to the increase in crime.

Are car prices lower in recessions?

The used car economy has declined during previous recessions, but analysts predict this time will differ. Usually, recessions lead to a surplus of unsold trucks and cars, which lowers prices as demand decreases.

During the pandemic, automobile supply fell below demand due to supply chain issues. Since dealers will not have much extra inventory, used car prices during recession will remain high.

In 2022 and 2023, Cox Automotive’s senior economist Charlie Chesbrough predicts a limited amount of discounting. There will be a limited amount of inventory, requiring dealers to negotiate.

How do used car markets usually react to recessions?

• Increased interest rates affect auto sales
  As a general rule, Federal Reserve interest rate increases are intended to make borrowing more expensive. Higher interest rates make paying back loans more costly, making people and businesses less likely to borrow money. This has had a significant influence on the housing market. The mortgage rate will increase by approximately 6% in 2023, making obtaining a mortgage significantly harder and more expensive. Increasing interest rates for personal and auto loans are influenced by credit score, which is slowing down the auto market. Buyers of new and used cars may incur thousands of dollars in extra costs due to short-term loans with high-interest rates.
• Demand and supply
  The demand for used cars dropped suddenly during previous recessions when dealers experienced a sudden decrease in demand. Dealers were forced to lower their prices to remain competitive due to low demand and oversupply, resulting in their lots being full for months. A recession is when buyers are uncertain whether they can afford a major purchase. This has historically affected the used car market as the lowest car prices are crucial. 

How’s the car market during a recession?

A severe recession is on the horizon, which will negatively affect the used car economy. Recession may force people to sell their gas guzzlers and second vehicles to repay their mortgages.

“Prices of luxury cars will drop first as we head into this recession, but prices of mid-range Japanese cars will remain high due to demand.” – Zak Sabbagh.

Recessions do not cause prices to drop as quickly as their counterparts in other markets, such as the stock market. People will take time to react and change their plans after the event so that the effects will trickle down gradually to the car market.

Those who have lost their jobs put off purchasing a car for as long as possible because they cannot afford it. Since people tend to purchase old cars during recessions, there is unlikely to be a significant decrease in old car sales during recession.

What makes this time different?

Changes to the supply chain
A recession hit the supply chain in 2008, just as it ran at peak capacity. Global lock downs due to COVID-19 were a significant cause of disruption in 2020. Businesses are shifting their supply chain management as economic activity recovers, but many industries, including automotive, remain significantly below pre-pandemic levels. Nowadays, used car market trends are unlikely to follow those of the past due to different circumstances.

Many dealerships still need help getting back to full capacity, even though production has increased. Across the country, there are still fewer cars on dealer lots than expected due to a vehicle supply shortage that peaked in 2021. Even a recession’s deflated demand could outstrip dealers’ capacity to meet consumer demand with reduced supply. There’s still a demand for used cars, and supply is low, so used car dealers are in good shape going into 2023.

Conclusion

Is it a good time to buy a vehicle?
Well! Buying a car during a recession may seem like a good deal, but you’ll have to pay it off. You don’t want to burn through your savings and make car payments at the same time when you’re facing financial uncertainty.

Contact Carsfast if you need assistance during this difficult time. We are one of the leading providers of Car Loans Canada, and we have assisted many people in getting the perfect car for their needs.

FAQs

Is it better to buy a car before or after a recession?

Although purchasing a car before a recession may seem counter intuitive, many advantages exist. You will save money in the long run and be able to purchase the vehicle of your choice.

Do people buy cars during a recession?

Historically, car prices have dropped during recessions. However, many other factors could affect your ability to purchase the car of your dreams. Car sales remain relatively stable as people may choose to take advantage of more affordable and reliable transportation during a recession.

Will car prices ever drop, or will they stay high?

Prices aren’t expected to return to pre-pandemic levels for a while. An 8.8% drop in the average price for a used car was recorded in December 2022 – the largest drop since 2009. In July 2022, there was a 4.6% drop in the average price for used cars that were three years old.

What assets do well in a recession?

Indeed, some investments do better than others during a recession, but no investment can be guaranteed. The top stocks in this category include healthcare and consumer staples (or funds that track such sectors), large-cap stocks, and income investments.

What time of year is best to buy a car?

Typically, car dealers want to achieve sales targets by the end of the month or year. During October and December, dealers are likely to clear out their inventory, and therefore it is a good time to buy a car since showrooms will likely offer a good discount to meet these targets.