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Shopping for a used car? Why new wheels might make more sense

The auto industry's pain is finally fading – but for used-car buyers, it's just beginning.

A recent report from Bank of Nova Scotia says the auto industry's deep plunge during the Great Recession is now being felt in rapidly rising prices for secondhand vehicles.

Consumers held off from buying new rides during the bleakest patch of the downturn, especially in 2009 and 2010. The sagging sales of that period mean that there are fewer older cars than normal on the market now – and that is allowing sellers to extract premium prices for well-used wheels.

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"Canadian used car prices are at record highs relative to the price of new models," Bank of Nova Scotia senior economist Carlos Gomes writes.

The Bank of Nova Scotia Used Car Price Index jumped 4 per cent in October compared to a year earlier.

Prices are likely to head even higher, Mr. Gomes suggests, as the delayed effect of the auto industry's huge swoon makes itself felt.

In the depths of the recession, annual sales of new cars in the United States fell below 10 million, a radical drop from the 17 million or so they had averaged the boom years.

Sales have now rebounded to about 15 million vehicles a year, but the number of new vehicles being leased is still 40 per cent below the average set in the decade before the recession.

Mr. Gomes projects that fewer than 400,000 vehicle leases will end in 2013, the lowest number in more than 10 years, meaning fewer used cars entering the market and further pressure on used-car prices to rise.

It takes about four years for new vehicles to enter the used market in significant numbers, Mr. Gomes writes, so he doesn't expect a "meaningful" replenishment of the used-vehicle supply until at least 2014.

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The dwindling number of used cars has produced a curious quirk: The prices of older used models are rising faster than the prices of newer used cars.

Pricing incentives have put a lid on the cost of brand-new cars in recent years, so consumers looking for relatively recent vehicles are turning to brand-new models instead of nearly new ones.

While cars more than three years old are seeing prices rise in double digits, the lower demand for year-old used cars has led to relatively restrained price gains of only 7 per cent this year, Mr. Gomes writes.

He doesn't expect newer used-vehicle prices to accelerate until the 2012 models (and the incentives that come with them) are cleared out of inventories.

Given the rise of used-car prices and the incentives available for new models, a new car might be the wisest financial decision for some consumers.

Unless, of course, you're confident the duct tape holding your '95 Chevy Geo together will last at least another year.

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About the Author

Josh O’Kane is a reporter with The Globe and Mail's Report on Business. Since joining the paper in 2011, he has told stories from New Brunswick to Nairobi. More


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