How Will High Prices and Fewer Incentives Shape Canada’s Car Market in 2025?

While electrification continues to expand, changes to government policies on incentives, persistent high prices, and global uncertainties are affecting the annual automotive landscape in Canada.

Overview of New Vehicle Sales in 2025

• Sales Forecast:
  Canadian new car sales are projected at 1.84–1.85 million units for 2025, a slight increase from the 1.82 million units sold in 2024. The 2024 figure represented an 8% increase over 2023 and was the strongest performance in the past five years.
• Monthly/Quarterly Performance:
  At the beginning of 2025, January sales rose 3.1% year-over-year (approximately 118,000 units), matching levels last seen in 2018. The fourth quarter of 2024 saw a 3.4% increase over the preceding quarter, helping to offset more moderate results in the middle of the year.
• Underlying Trends:
  High prices, normalization of post-pandemic supply, and evolving incentives are influencing demand and shaping the composition of both new and used vehicle sales.

Zero-Emission Vehicles and Electrification

• Market Share & Volume:
  Zero-emission vehicles (ZEVs), including battery electric and plug-in hybrid models, are expected to comprise 16% of new Canadian vehicle sales in 2025, which is an increase from 12% and more than 223,000 units in 2024.
• Policy and Incentives:
  Two main incentive programs—Canada’s federal iZEV rebate (up to $5,000) and Quebec’s Roulez Vert—are being paused or phased out in 2025. This change could affect the federal goal of ZEVs reaching a 20% share of new sales by 2026.
• Manufacturer Response:
  As government support decreases, automakers are adapting with their own incentives and pricing strategies. Many are aiming to keep ZEV pricing stable or moderately reduced to support ongoing consumer interest in the absence of some public rebates.
• Sales Mix:
  ZEV share growth may slow in 2025. Hybrids and plug-in hybrids are projected to represent a larger proportion of new electrified vehicle sales, particularly for fleet and government buyers.

Used Vehicle Market: Prices, Values, and Supply

• Supply and Pricing:
  The supply of used vehicles (up to 8 years old) is projected to decline by 3.2%, to approximately 1.57 million units in 2025. This development reflects the impact of reduced new vehicle sales and lease activity between 2020 and 2023.
• Retention and Depreciation:
  The Canadian Black Book Used Vehicle Retention Index ended 2024 at 135.7 (down 7.8% year-over-year) and is anticipated to decrease further to 123.1 by the end of 2025, representing a further 9.3% decline. Depreciation for two- to six-year-old vehicles is forecast at 12%, a slightly slower pace than in previous years.
• Cross-Border Dynamics:
  Continued U.S. demand for Canadian used vehicles remains a factor, though variables such as currency rates and trade policy may influence cross-border flows in 2025.

Vehicle Prices, Incentives, and Affordability

• New Vehicle Prices:
  New vehicle prices have increased by an estimated 20–30% since before the pandemic. This has influenced affordability for many buyers, encouraging them to consider smaller models, alternative brands, or longer financing and lease periods.
• Incentive Levels:
  Dealer and manufacturer incentives averaged 6.8% of MSRP in 2024, and projections place this figure at approximately 9.0% for 2025, which is close to pre-2021 levels. These measures are intended to address affordability concerns and maintain transaction levels.

Interest Rates and Financing Trends

• Bank of Canada Policy:
  In 2025, the Bank of Canada’s policy rate has been reduced from 5% in mid-2024 to 3.25% by year-end, with projections indicating a potential further reduction toward 2% by the end of 2025.
• Loan and Lease Rates:
  Average auto loan rates decreased to 6.9% from a previous peak of 8.3%, with indications of continued downward movement through 2025, which may have a positive effect on retail demand.
• Lease Market:
  Lease penetration is anticipated to reach 29% of all retail transactions in 2025, up from lower levels seen during pandemic-related disruptions. This rate, while just below pre-2020 figures, reflects the impact of both lower interest rates and increased new vehicle prices.

Fleet, Commercial, and Government Vehicle Sales

• Fleet Recovery:
  Fleet sales—including rental, commercial, and government vehicles—have improved in step with more consistent new vehicle production. Daily rental fleet sales, in particular, are expected to see ongoing growth in 2025.
• Electrification of Fleets:
  Growth in fleet battery electrification has moderated. Many commercial and government buyers are focusing on hybrids and plug-in hybrids as a means to balance enhanced efficiency with practical operating needs within the context of zero-emission vehicle policies.

Market Challenges and Uncertainties

Several factors are contributing to uncertainty for the Canadian auto market in 2025:

• Potential U.S. Tariffs:
  Proposed U.S. auto tariffs (up to 25%) could influence vehicle pricing, supply chains, and currency exchange rates, with corresponding effects on both new and used vehicle markets in Canada.
• Interest Rate Volatility:
  Although declining interest rates are providing support at present, broader economic or policy changes could result in increased rate volatility.
• Policy and Incentive Changes:
  Adjustments to zero-emission vehicle incentives may affect consumer preferences and automaker strategies within the Canadian market.
• Affordability Concerns:
  Ongoing high vehicle prices, even with increased incentives, may limit market growth for some consumers.

Looking Ahead for 2025

• Both sales volumes and fleet activity have shown signs of stabilization, although price and affordability issues remain.
• The used vehicle market is expected to experience lower prices, influenced by reduced supply linked to previous sales and lease declines.
• Electrification is anticipated to continue, with hybrids and plug-in hybrids making up a larger share of growth relative to pure battery electric vehicles in the short term.
• The automotive industry will continue to navigate evolving economic and policy variables, including interest rates, incentive programs, and international trade considerations.

2025 represents a period of adjustment for Canada’s automotive sector. With sales levels returning to a more consistent pace, industry stakeholders are adapting to sustained higher prices, evolving policies, changing mobility preferences, and macroeconomic uncertainty. Continued responsiveness to market conditions and shifts in consumer demand will remain important as the sector navigates these trends.

Sources

• MarkLines - Automotive Sales in Canada by Month
• Scotiabank Global Auto Report, January 16, 2025
• Canadian Black Book 2025 Canadian Market Preview

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