BMW-Loving Canadians Rebuff Carney to Pile Up Auto Debt

Canadians are finally starting to heed central bank chief Mark Carney’s warnings about the perils of taking on too much housing debt. Yet when it comes to borrowing for a new Porsche or BMW, they aren’t holding back.

Sales of Daimler AG’s Mercedes-Benz have jumped 168 percent since 2004 to 33,116 last year, while those of Volkswagen AG’s Porsche SE have gained 65 percent, according to DesRosiers Automotive Consultants Inc. data compiled by Bloomberg. Bayerische Motoren Werke AG’s BMW 3 Series sales exceeded Honda Motor Co.’s Accord last year as luxury automakers win over Canadians by expanding offerings and pricing some models closer to traditional family cars.

Canada’s major banks have more than tripled their lending to car buyers since 2007, the year before the global credit crisis struck, and automakers are increasing dealer financing. The appetite for cars may undermine the Bank of Canada’s forecast that consumer debt will stabilize around a record 165 percent of disposable income, one reason policy makers cited last month for delaying plans to raise interest rates.

“Canadians are feeling more and more confident and seem willing to increase the debt level at a faster pace again,” said Tom Higgins, Burlington, Ontario-based vice president of analytics and decision services at credit-reporting company TransUnion Corp. “It’s a little bit disconcerting from that perspective given all of the information and warnings that we hear from the Bank of Canada and from the finance minister.”

Global Crisis

Canada’s economy emerged from the global financial crisis faster than its Group of Seven peers, and none of its banks failed or required injections of public capital. Canadian house prices have risen 39 percent since June 2006, according to the Teranet-National Bank price index, while U.S. house prices fell 30 percent over the same period, according to the S&P/Case- Shiller Composite-20 home price index.

Canada’s benchmark Standard & Poor’s/TSX Composite Index has gained 2.9 percent over the past 12 months, trailing the 13 percent gain in the Standard & Poor’s 500 Index of U.S. stocks. Canadian government bonds have returned 2 percent over that period, compared with 1.7 percent for U.S. Treasuries, according to Bank of America Merrill Lynch data. With its top credit rating, Canada has been a haven for foreign investment, government figures show.

European and U.S. stocks fell with Spanish and Italian bonds as the region’s finance ministers prepared to meet to discuss aid to Cyprus and Greece. The Stoxx Europe 600 Index dropped 0.6 percent today, the S&P 500 Index was down 0.1 percent in New York and the S&P/TSX fell 0.4 percent in Toronto.

Moody’s Downgrade

Canadian officials are concerned that excessive borrowing might derail the world’s 11th-largest economy if consumers are unable to repay their debts. Already, consumer debt levels are higher than in the U.S. and U.K. as Carney has kept his policy interest rate at 1 percent since 2010. The elevated debt prompted Moody’s Investors Service on Jan. 28 to cut the credit ratings of Toronto-Dominion Bank, Bank of Nova Scotia and four other Canadian lenders.

The Bank of Canada’s December Financial System Review called “the high level of household indebtedness” and elevated housing prices the greatest domestic risk to the economy. Finance Minister Jim Flaherty tightened standards on mortgage- loans for fourth time last year to discourage borrowing.

Those measures are starting to work. Flaherty told lawmakers Feb. 5 there has been a “welcome moderation” in housing markets after earlier pointing to the risks of condo overbuilding in cities such as Vancouver and Toronto.

Feeling Confident

“I am glad to see that some of the recent steps the government has taken have encouraged households to moderate their accumulation of debt,” Prime Minister Stephen Harper told lawmakers last week. He said the rise in household debt has been primarily mortgage-related “because Canadians have been feeling confident about the state of their own household.”

Cars may be the new outlet for Canadians’ pursuit of the good life. Retail sales rose 0.2 percent in November for a fifth straight gain to C$39.4 billion ($39.1 billion), led by record purchases of new cars, Statistics Canada said Jan. 22. Automobile and parts sales rose 1.8 percent to C$9.13 billion.

Canadian new-car sales totaled 1.68 million in 2012, DesRosiers data show, up 5.7 percent from 2011. Total U.S. deliveries of cars and light trucks climbed 13 percent last year to 14.5 million, the highest since 2007, and analysts said they expect the market to exceed 15 million this year.

Among Canadian buyers of imported luxury cars is Vinny Ng, who smiled as he watched a BMW pull out of a parking spot in a suburban Ottawa supermarket lot yesterday, allowing him to back in his white BMW 328i.

‘More Solid’

“Everything is more solid,” Ng, 30, said of his car on the way into the store. “It’s harder to rust compared to a Japanese car,” he said, adding “I work at an auto body shop, that’s how I know.”

Looking around the lot, where most rows of about 20 cars had at least one BMW or Mercedes, Ng said he wasn’t that worried about signs of excessive consumer debt. BMWs costing around C$35,000 aren’t that expensive for the value they offer, he said, glancing at a Toyota Camry parked nearby.

The BMW “has more luxury than a Toyota,” he said. “If you love the BMW you don’t care about anything else.”

Consumers like Ng are helping to propel economic growth. The Bank of Canada predicts that the economy will expand 2 percent this year, with 1.1 percentage points of that coming from consumption.

Loans Triple

Non-mortgage debt per person reached a record average C$27,485 in the fourth quarter of 2012, up 5.9 percent from a year earlier, according to a Feb. 5 report from Chicago-based TransUnion. The average non-bank auto loan grew 8.9 percent from a year earlier. The Bank of Canada also calculates that auto loans from chartered banks have more than tripled to C$54 billion in the third quarter of last year from C$17.3 billion in the fourth quarter of 2007.

Rising debt has corresponded to increased sales at luxury- car dealers, who predict further gains as immigrants drive sales and concerns about a collapse in housing prices ease. Since 2004, annual luxury car sales have risen by 30 percent, compared with 9.2 percent for all automakers, according to DesRosiers data compiled by Bloomberg.

“There is still a lot more room to grow the luxury segment here in Canada,” Tim Reuss, president and chief executive officer of Toronto-based Mercedes-Benz Canada Inc., said in a telephone interview. About C$160 million will be invested in new or expanded dealerships in the next three or four years, he said, with untapped potential from Canadians, who still buy fewer and smaller luxury cars than in the U.S.

Range Rover

One strong source of demand for luxury cars is immigrants from Asia, industry executives say. Vancouver, where Statistics Canada data show 15 percent of the population has a first language that’s a Chinese dialect, is one of the country’s strongest markets for Range Rovers, Tata Motors Ltd.’s Land Rover luxury sport-utility vehicle brand, said Lindsay Duffield, president of Jaguar Land Rover Canada.

Another reason for rising sales of luxury cars is the strength of the Canadian dollar, which has climbed 27 percent rise against the euro since the end of 2008. Porsche cut its prices by an average of C$5,200 at the start of 2011. And makers of luxury brands have introduced lower-priced models -- the BMW 3 Series sedan was listed online starting at C$35,900 last week, compared with C$23,990 for the Honda Accord.

“Over the last five years, our Accord sales are not what we would have expected them to be,” Dave Gardner, vice president of sales and marketing at Honda Canada, said in a telephone interview from Markham, Ontario. “You look in the newspaper and you go, ‘Boy, I can lease a BMW for less than I can an Accord,’ so clearly that is also influencing the shift.”

Affordable BMWs

Bryce Wilson, a high school teacher in Ottawa, is looking to replace the BMW 325i he bought six years ago with a newer model, and he plans to pay about C$15,000. He said used BMWs are affordable because so many owners are buying new ones these days.

Wilson said he’s attracted by the brand’s reliability. “You don’t have to repair them very often,” said Wilson, 54. “It’s well engineered.”

Wilson says the debt trap will be an issue for some Canadians. “This is where the middle class is really in trouble, is the fact that they have amped up their cards right up to the limits,” he said by telephone. “They are going to have to be paying interest on that, and how do they catch up?”

A broad clientele for luxury cars doesn’t surprise Michael Mrak, general manager of Mark Motors of Ottawa. “You would be shocked to see who buys cars here, everybody from all walks of life,” he said in an interview at his office perched above a Porsche showroom. “It could be business people, it could be professionals, government officials.”

“You don’t know what’s actually tucked at home in the garage,” he said.

To contact the reporters on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net; Ilan Kolet in Ottawa at ikolet@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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