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Some readers believe the only good car is a used car. That's because every time a new vehicles drives off the lot – POOF! There goes 20 per cent or so of the price you paid. Buy used, and you don't pay the depreciation.

Nice idea, if you can execute it. But Canada's used car market has a relatively thin supply of good, late-model vehicles. With tight supply comes what economists call "upward pricing pressure."

A recent analyst note from J.D. Power and Associates notes that used car retailers in Canada are having a hard time finding an extensive and relatively affordable supply of high-quality, nearly-new vehicles. Power reports that retailers have seen the cost of used vehicles rise six per cent since 2008, yet prices at sale have remained stable over the last five years – "between annual lows of $17,525 and highs of $18,443."

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Power analyst Brian Murphy does not expect wholesale used car prices to drop in the foreseeable future, which means used car deals should be somewhat hard to find.

Ah, the supply problem. Used vehicles begin their route to the marketplace as new vehicles. The Great Recession of 2009 put a dent in new car sales, which means there are fewer three- and four-year-old used cars available. J.D. Power points out that in 2009, new vehicle sales dropped to about 1.45 million from more than 1.6 million in 2007 and 2008.

"What's more, vehicle leasing, a reliable source of vehicles for the used lot that all but dried up that same year, went from 43 per cent of the total market in 2007 to 14 per cent in 2010," notes Murphy. The point there is that retailers have fewer lease return vehicles to sell. That also puts the squeeze on the supply of generally well-preserved used cars.

On the other hand, used vehicle prices will likely be held in check in part by the rich incentives in Canada's new-vehicle marketplace.

"Given the appetite of manufacturers in Canada to spend an average of 14 to 15 per cent of the total sales price on incentives, monthly payments on a new vehicle can actually be surprisingly close to that of a three-year old used vehicle," notes Murphy.

Confused? You should be. Murphy predicts that Canada's used vehicle market is in for some "turbulent times." Retailers face a challenge to sell used vehicles at a profit. Meanwhile, "the average margin on a used-vehicle in 2007 was almost 13 per cent," but that number today "is barely above 10 per cent."

The takeaway for buyers: Limited supply and dealers being squeezed for used vehicle profits will make it tougher for consumers to find really great used cars – at least as a general rule. To put it another way, used car buyers can expect retailers to bargain hard as they battle to find profits from nearly-new vehicles that are in short supply.

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About the Author
Senior writer, Globe Drive

In 25 years of covering the auto industry, Jeremy Cato has won more than two-dozen awards, including three times being named automotive journalist of the year. Jeremy was born in Montreal and grew up in the San Francisco Bay Area. More

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