Priced out of the housing market, some younger clients are moving down the goal ladder and focusing on a dream vehicle instead.chanakon laorob/iStockPhoto / Getty Images
Many financial guidelines allocate 10 per cent of a person’s budget toward a car purchase. But is that realistic today?
According to Statistics Canada, the median after-tax household income is $74,000, translating to just over $600 a month to spend on a vehicle.
With the average new car going for just under $66,000, according to AutoTrader.ca’s price index report, and used vehicles costing on average $37,000, clients’ car budgets often significantly surpass the ideal guideline, advisors say.
While car prices have come down slightly from the 2023 highs, they’re expected to remain high, driven by inflation, inventory issues, higher interest rates and, now, expected tariffs.
Data analysis company J.D. Power pegs the average new car payment at around $880 a month. In many cases, vehicle expenses now exceed what many clients spend on groceries, advisors say.
Dylan Wilson, portfolio manager at Verecan Capital Management Inc. in Toronto, says that like housing, cars definitely take up a larger portion of many clients’ incomes. But he isn’t convinced it’s entirely about cars being more expensive.
“With tension in the economy, it’s not a time when a lot of people can be taking on extra expenses,” he says, “but many people still want to have a vehicle that they think represents them.”
Mr. Wilson says affordable cars are out there, but notes that changing consumer habits play a role in higher car payments. For example, more clients love the expensive technological features in newer vehicles, some of which are mandated for emission standards, he says. They also love bigger vehicles, which they deem to be safer.
“The baseline sedan that was the norm 10 years ago is now a mid-tier or upper-level tier SUV,” he explains. “That comes with a substantial price increase. If that is the new baseline, then it becomes a bigger line item.”
Shiraz Ahmed, founder and senior portfolio manager of the Sartorial Wealth Team at Raymond James Ltd. in Toronto, concedes that many of his clients now allocate 20 per cent toward vehicles and tweaked their monthly budgets in other areas to break even.
Mr. Ahmed also has younger, high-earning clients purchasing luxury vehicles. Priced out of the housing market, these clients moved down the goal ladder, focusing on a dream vehicle instead. Some of these vehicles are seen more as passion investments, similar to art or designer handbags, he says.
“There’s a little bit of YOLO and FOMO mentality going on. They feel that, at least, they can get a car,” Mr. Ahmed says. “They see having a vehicle as a way to flex.”
For other clients who need a regular, reliable vehicle for work or family obligations, he asks: “What is the problem you are looking to solve with the car?”
Mr. Ahmed works with them on possible solutions and lowering expectations if necessary. To stay on budget, it may not be a three-year-old car but one that’s five years or older with more mileage, for example. He notes that almost all new cars may have higher-than-anticipated prices because of longer wait times for brand-new vehicles.
He also advises clients to concentrate on the actual selling price over anything else.
Automotive dealers often emphasize payments over a monthly, biweekly or weekly period, he says. And sometimes, clients are kept in the dark about the overall amount of interest they’re paying on top of the actual price, he adds.
Dan Park, chief executive officer at online used car retailer Clutch, says the duration of average car loans has increased every year, coinciding with rising vehicle prices. Now, on average, it’s around 72 months, he says, but most dealerships can extend as far as 96 months.
“Larger loan terms are also exacerbating the negative equity problem,” he says.
By negative equity, Mr. Park is referring to owners being “upside down” in their car’s financial position, which means the amount they owe on the vehicle is more than the car’s market value. He says most car owners trade in their cars around the three- to six-year mark. If they have negative equity, it gets rolled into the next vehicle financing arrangement, pushing a person’s monthly car payment even higher.
According to Clutch’s data on its vehicle owners, 7 per cent of car owners seeking to sell their car had negative equity in the first quarter of 2024. But that number rose to 24 per cent for this year’s first quarter.
“It’s this problem that they just try to keep kicking down the road, but the payment keeps getting bigger,” Mr. Park says. “That’s part of the reason why there are larger payments on top of the fact that interest rates and prices of all vehicles have gone up over the past several years.”
Still, Mr. Wilson is a proponent of choice, saying clients just need all the facts. They often make their car decisions before they see him, anyway.
“We have an honest conversation about what their cash flow can support,” he says. “If they decide on an expensive car out of budget, they need to know the impacts of that decision.”