How George Bush may save the Canadian Aftermarket

Combine the high rate of U. S. foreclosures, more vehicles turned in at lease-end as well as high fuel prices and the result will be a flood of SUV’s and light trucks on the used market (which is continent-wide) with low residual values.

There’s a saying that we’re all connected to every other person on earth by no more than six contacts. The “six-degrees-of Kevin-Bacon” theory has been around for years, but few think of it in economic terms. Everybody knows how years of insane lending practices by U. S. banks led to a near collapse and government bailout of the U. S. banking system, something called the “sub prime crisis.”

For those of you who’ve been under the hoist for the last six months, here’s how it played out: U. S. mortgage brokers and banks loaned mortgage money with little or no collateral, often with no money down, to people who can barely afford the monthly payments. Many of the mortgages were structured so that the monthly payments were “interest only” for the first couple of years, after which the payments were set to balloon dramatically. Obviously, this is O. K. when real estate values are climbing. Can’t afford the payments? Sell, take the profits and now you have a down payment on the next house. Also obviously, when the system starts to collapse, house prices fall, and the collapse snowballs, ruining families and banks alike. So who cares if it’s a U. S. problem?

The American banks limited their risk by packaging those risky mortgages and reselling them to banks around the world, so when they turned out to be worthless, the pain spread and is spreading, around the world. Canada is relatively untouched, so again, so what? Well, GMAC recently announced measures that will restrict new vehicle leasing and we can expect other vehicle financing firms to follow suit. And commercial banking units are also pulling in their horns, so expect business financing to be tougher to get this year. Combine the high rate of U. S. foreclosures, more vehicles turned in at lease-end as well as high fuel prices and the result will be a flood of SUV’s and light trucks on the used market (which is continent-wide) with low residual values.

Traditionally, this meant a higher scrappage rate, as owners can afford later model used cars, but depending on factors like job losses (particularly in Ontario’s dying manufacturing sector) and weakening real estate values, many owners will have to stand pat. This could be an opportunity for the industry, as it should be easier to make the “fix, don’t replace” proposition. Or we could see fewer kilometres driven, extending maintenance intervals and reducing the rate of repair. What we don’t need is two-car families dropping one vehicle, or a flight from the suburbs into the cities, reducing the daily commute. On the other hand, as fuel prices rise, there is a move to smaller, fuel efficient vehicles, which in the long run is good for the environment and the economy as a whole by keeping alternatives to driving down.

I know, the daily commute is a target of the environmentalists, but we’re on the brink of a new generation of extremely low emission vehicles, which combined with provincial programs, may be another positive driver of traffic in the bays. The good news is that although the U. S. is a major proponent of market economics, they’re in the process of a massive government bailout of the same banks that caused this mess in the first place, so it looks like the U. S. taxpayer will foot the bill for the problem. Somewhere, Karl Marx is smiling, but in the meantime, from a Canadian perspective, it’s thanks President Bush! It’s tough enough to make a living without another Great Depression.

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