Pricing the Wrong Risk

September 16, 2026

August's market braced for a vehicle tariff that never applied, loosened credit into a rate increase, and called a shrinking borrower pool an improvement.

<aside class="nl-callout"><h2>THE MONTH IN ONE SENTENCE</h2>

<p><em>Sales rose for a third month, wholesale values stopped falling, and the numbers everyone reacted to were not the numbers that changed.</em></p></aside>

<h2>OPENING</h2>

<p>August was the month Canada and the United States stopped negotiating. Talks collapsed on 21 August, a 50% American tariff took effect on roughly $28 billion of Canadian goods by Ottawa's count (about US$20 billion by Washington's), and Canada answered with C$27.6 billion of counter-tariffs from 8 September. Every headline said the tariff hit vehicles. It did not. Passenger vehicles, light trucks and parts are not on the list; they already carry the separate 25% duty from April 2025. What changed was the path to relief, which closed, and a threat to double the vehicle rate in January.</p>

<p>The market priced the headline anyway: in the week the talks fell apart, the auction sale rate at Canadian wholesale lanes dropped to 18.4%, from 46.6%. The same reflex ran through the credit data. Canadian delinquency improved in a quarter when new loans opened fell 9.2%, and American lenders wrote the easiest credit since 2015 before the Federal Reserve's first increase since 2023. This issue is about the difference between what moved and what was priced.</p>

<h2>THE AUGUST DASHBOARD</h2>

<th>WHAT WE WATCH</th>

<th>WHERE IT STOOD IN AUGUST</th>

<th>SOURCE AND PERIOD</th>

</tr></thead>

<tbody>

<tr><td>Bank of Canada policy interest rate</td><td><strong>Held at 2.25%</strong></td><td>Seventh consecutive hold, 2 September. Council flagged upside inflation risk.</td></tr>

<tr><td>Canadian new light-vehicle sales</td><td><strong>About 168,000 units, up 5.4%</strong></td><td>Third straight gain. Selling pace 1.86 million. DesRosiers, August.</td></tr>

<tr><td>Canadian retention index</td><td><strong>127.5</strong></td><td>Canadian Black Book, August. Wholesale value of 2 to 6 year old vehicles, down 7.6% on the year.</td></tr>

<tr><td>New auto loans opened, Canada</td><td><strong>Down 9.2%</strong></td><td>Second quarter, year over year. Average new loan up 6.5% to C$36,979. Equifax.</td></tr>

<tr><td>American selling pace</td><td><strong>16.8 million vehicles a year, up 1.5%</strong></td><td>Sixth month above 16 million. Dealers association, August.</td></tr>

<tr><td>American credit availability</td><td><strong>105.3</strong></td><td>Cox Automotive Dealertrack index, August. Loosest since 2015. Record 31.3% of loans beyond 72 months.</td></tr>

</tbody></table></div>

<h2>01 Canada braced for a tariff on cars that never applied</h2>

<p>On 18 August the United States suspended a 50% duty on Canadian goods to keep talking; on 21 August Prime Minister Carney announced that negotiations were suspended, calling the last American terms "unfair, uneconomic," and the tariff landed at midnight. On 25 August Ottawa published counter-tariffs of 15%, 25% and 50% on C$27.6 billion of American goods, effective 8 September. On 8 September Washington escalated again, adding import bans from 29 September.</p>

<p>None of it touched passenger vehicles, light trucks or parts. The American proclamation is titled for motor vehicles, but its annex lists cement, plywood, furniture, textiles and machinery; the only vehicle line added on 15 September, cars under one litre, is not built in Canada. Canada's counter-list contains no passenger vehicles, light trucks, parts or tires. The trade press, largely, reported a tariff on cars.</p>

<p>What did change is the outlook. On 24 August the President wrote that tariffs on Canadian cars, trucks and parts would rise to 50% from 1 January 2027. No proclamation had been published at our cut-off. Honda said a new North American plant depends on the trade agreement being extended. Toyota told analysts it intends to recover roughly half of a ¥1.2 trillion cost increase through gradual pricing; Honda says it is absorbing. Korean auto exports fell 29.8% in August, partly on increased American production, the trade ministry said. Localisation is what moves the sticker.</p>

<p>The August tariff shock to auto finance is a non-event, and the market treated it as a large one. Canadian Black Book's auction sale rate fell to 18.4% in the week ending 22 August, from 46.6%, and recovered to 36% in a fortnight. That is the cost of pricing a headline. The real exposure is dated 1 January 2027, is not yet law, and runs through Ontario assembly and the Japanese captives that finance most of it. For a lender the indicator is not the tariff. It is whether Toyota and Honda begin staged price increases, because those land in amount financed first.</p></aside>

<h2>02 Fewer loans, bigger loans: the Canadian origination paradox</h2>

<p>Equifax Canada's second-quarter report, published 24 August, is the month's most important Canadian credit release, and its headline was the wrong one. Auto loan balances grew 4.9% on the year to C$179.1 billion. New auto loans opened fell 9.2%, a repeat of the first quarter. The average new loan rose 6.5% to C$36,979. The 90-day delinquency rate improved to 1.10% from 1.11%.</p>

<p>Statistics Canada counted 547,673 new registrations in the second quarter, the strongest since 2019, and August sales rose 5.4%, a third consecutive gain. Two things can reconcile a growing market with shrinking loan counts. Mix shifted up: zero-emission vehicles took 10.7% of registrations against 8.6% a year earlier, and hybrids rose 39.5%. The second is our inference, not Equifax's: more transactions are being financed outside the auto-loan file, through leases, lines of credit and cash.</p>

<p>Wages close the loop. August average hourly wages rose 2.0% on the year, the bottom quartile 1.1%, against inflation of 3.0% and gasoline up 22.8%. Employment fell by 42,000, with unemployment flat at 6.4% only because participation fell. Long-term unemployment is 24.0% of the unemployed, against 17.1% before the pandemic. The headline is stable. The borrower underneath it is not.</p>

<p>The lender's share of the retail transaction is shrinking while the transaction grows. For a model that earns on finance placement, that is the number to watch. And the delinquency improvement needs a caveat: goeasy reported second-quarter originations down 70%, to C$272 million, mainly in merchant-originated automotive and powersports lending, with net charge-offs of 16.7% against 8.7% a year earlier. When a large non-prime funder stops writing, the marginal borrower leaves the new cohorts and the aggregate looks healthier. That is survivorship, not repair.</p></aside>

<h2>03 American credit loosened by structure, into a rate increase</h2>

<p>Cox Automotive's Dealertrack index of auto credit availability reached 105.3 in August, its highest since November 2015. Approval rates held near 74%. The subprime share rose to 16.6%, up 3.0 percentage points on the year. Loans beyond 72 months reached a record 31.3%, up 5.8 points. Trade-ins carrying negative equity reached 57.4%, up 3.9 points. The average contract rate rose to 10.99%.</p>

<p>Credit is not getting cheaper. It is getting longer, and it is being written against collateral the borrower already owes money on. Cox's Scott Vanner wrote that "lenders are taking on more risk, but they are being compensated for that risk as the contract rate rose faster than the underlying Treasury yield." That was true in August. It may not survive September.</p>

<p>Since month-end: on 16 September the Federal Reserve raised its target range by a quarter point to 3.75% to 4.00%, by a 12 to 0 vote, its first increase since July 2023. The statement said inflation "remains elevated" and that the move "will support a timelier return" to the 2% goal. August consumer prices rose 3.4% with gasoline up 27.4%. The ten-year Treasury yield reached 5% on 15 September. Michigan consumer sentiment fell to 47.8, with one-year inflation expectations at 4.6%.</p>

<p>Issue No. 1 argued that American lenders were underwriting the 2026 vintage against a rate path the Federal Reserve had not endorsed. A month later the committee has moved the other way, and the vintage is longer and more leveraged. A 31.3% share beyond 72 months on a 57.4% negative-equity trade-in base is a book that depends on used values holding for six years. Manheim's index fell 0.9% in August; Capital One's auto charge-off rate rose to 1.66% from 1.48% in July. The subprime tail we called "healing" in July is still healing. The middle of the book is where the new risk is being written.</p></aside>

<h2>04 Wholesale stopped falling. Retention did not.</h2>

<p>Canadian Black Book's weekly declines ran between 0.16% and 0.34% through August. Then the decline collapsed to 0.05% in the week ending 5 September, better than the 2017 to 2019 seasonal norm of 0.24%, before returning to 0.19%. Depreciation slowed. It did not reverse.</p>

<p>The monthly retention index tells the longer story. At 127.5 for August, wholesale values of two to six year old vehicles stood 7.6% below a year earlier and roughly 23% below the March 2022 peak. Retail listing prices drifted up over the same weeks, from about C$36,900 to C$38,500, which is mix rather than appreciation; the consumer price index for used vehicle purchases rose 3.8% on the year.</p>

<p>South of the border the shape is the same and the bottom is thinner. Manheim's index fell 0.9% in August, seasonally adjusted, to stand 0.4% above a year ago. Retail used listings rose 7% on the year to US$27,239. And the affordable band keeps disappearing: vehicles under US$15,000 were 15.1% of inventory in August against 20.6% a year earlier, with units down 25.9%.</p>

<p>The July thesis was origination volume rising into falling collateral. August softens the second half and hardens the first. Wholesale is finding a floor; the retention level is still 7.6% lower than the paper written a year ago assumed. The affordable-used shortage is now the binding constraint on non-prime origination on both sides of the border, and it explains the paradox in section 02 better than credit appetite does: the vehicle that fits an approved non-prime payment is increasingly not in the lane. Electric vehicles are the exception, up 4.5% on the year at Manheim and one of only two segments rising.</p></aside>

<h2>05 Alberta is running the insurance experiment the rest of Canada should watch</h2>

<p>Canada's consumer price index for passenger vehicle insurance rose 5.5% on the year in August. That national figure hides the story. Ontario was up 1.8%. British Columbia was flat. Alberta was up 24.6%, after 29.4% in July, with a rate cap in place: Alberta limits increases for drivers who qualify as good drivers to 7.5% in 2026. The gap between a 7.5% cap and a 24.6% index is our measure of what is landing on everyone the cap does not cover.</p>

<p>The Alberta regulator's annual report, published 27 August, fills in the mechanism. The average full-coverage premium rose 8.7% in 2025 to C$1,903. Collision severity is up roughly 47% since 2021, bodily-injury severity roughly 36%. Among drivers with an at-fault claim or a major conviction, only 67.7% carry collision coverage, so roughly a third of that group drives without physical-damage cover. The regulator says it will not approve further increases until insurers relax their collision and comprehensive underwriting restrictions.</p>

<p>Relief is scheduled, not delivered. The Care-First model takes effect on 1 January 2027 with a regulator estimate of a 13.7% average premium reduction, about C$297 per vehicle. In the United States the opposite scissors persists: insurance prices fell 5.1% on the year while repair costs rose 5.2%.</p>

<p>Alberta is one of the two provinces where OCAL is licensed, and the payment-to-income arithmetic for an Alberta applicant now swings by several hundred dollars a year depending on when the deal is written. For a lender, the number that matters is the 67.7% collision take-up: a financed vehicle without physical-damage cover is a deficiency waiting to happen, and guaranteed asset protection does not respond to a total loss without a primary settlement. Ontario's 1 July optionality created the same exposure by a different route. We flagged it in July; no regulator has yet published early experience.</p></aside>

<h2>06 Europe and Asia radar</h2>

<h3>China exported a collapse</h3>

<p>The China Association of Automobile Manufacturers reported August sales of 2.71 million, down 5.1% on the year. Domestic sales fell 24.2%, the fifth consecutive month down more than 20%. Exports were 1.01 million, up 65.3%, the third month above a million; year-to-date exports of 7.15 million already exceed all of 2025. On 1 September three ministries issued guidance instructing exporters to price on cost and avoid sharp changes abroad, the first attempt to keep the domestic price war out of export markets.</p>

<p><strong>What to watch.</strong> A fourth month above one million, and whether Beijing's guidance firms Chinese pricing in Mexico and Brazil, slowing the used-value erosion those imports cause.</p>

<h3>The British used electric recovery is real and now dated</h3>

<p>Auto Trader reported used electric prices up 3.8% on the year in August, a third consecutive gain, with three to five year old cars up 9.4%. Solera cap hpi was reported putting battery-electric values up 0.1% in a month when the whole market fell 0.9%, and forecasting the advantage would narrow through the fourth quarter. Germany's August battery-electric share hit 32.4%, France's 38%, Britain's 29.8%, each pulled by a fiscal lever.</p>

<p><strong>What to watch.</strong> Manheim's electric index, up 4.5% in August, follows the British curve with a lag. If cap hpi is right, the North American electric premium narrows into the first quarter.</p>

<h3>Canada's Chinese electric quota: the primary data finally exists</h3>

<p>Global Affairs Canada now publishes utilisation data. The first window closed 31 August with 15,603 of 24,500 units used, 63.7%. Unused volume rolls forward: 33,397 units are available in the window that opened 1 September, and 160 had been used by 11 September. Trade reporting attributes nearly all of it to the Shanghai-built Tesla Model 3. No BYD, Chery or Geely vehicle has entered. Separately, Ottawa published the proposed repeal of the zero-emission sales mandate on 15 August; dealers do not expect a replacement standard before 2027.</p>

<p><strong>What to watch.</strong> The first permit issued to a Chinese brand, not Tesla. Until then, the "affordable Chinese electric" price anchor everyone models does not exist in Canada.</p>

<h2>07 What the market is missing</h2>

<p><strong>Every measure of Canadian auto credit health improved in the second quarter, and the reason is that the borrowers who would have failed were not lent to.</strong></p>

<p>The 90-day auto delinquency rate improved to 1.10%. TransUnion's consumer-level 90-day rate rose 4 basis points, but subprime balances grew more slowly than super-prime. July consumer insolvencies fell 0.7% on the year, after June's 11.8% jump. Read those together and Canadian credit looks stabilised. Now read the origination side: new auto loans opened fell 9.2%, the second quarter running, a major non-prime point-of-sale lender cut originations 70%, and on both sides of the border the affordable used vehicle a non-prime applicant can be approved against is disappearing from inventory.</p>

<p>That is not a healthier borrower. It is a smaller cohort. A delinquency rate is a fraction, and the denominator is being managed by lenders exiting the bottom of the market and by inventory that will not support the payment. The borrowers declined in the second quarter still need a vehicle. They are the reason twelve-month consumer insolvencies are still up 5.4%, British Columbia's up 14.1%, while quarterly delinquency edges down. If the improvement is real, it holds when originations recover. If it is composition, it reverses the moment a lender re-enters non-prime. Watch the count of new loans opened, not the rate.</p>

<h2>08 The OCAL watchlist: 30 / 90 / 365 days</h2>

<ul>

<li><strong>Federal Reserve, 27 and 28 October.</strong> The next meeting after a unanimous increase and a statement promising to "deliver price stability." If a second increase follows, the 31.3% beyond-72-month share in section 03 is the exposed number.</li>

<li><strong>Statistics Canada.</strong> July retail trade the week of 21 September; August insolvencies in early October, the first read on whether July's decline held.</li>

<li><strong>The Federal Register.</strong> Any proclamation implementing the 1 January 2027 vehicle rate. Until it exists, the 50% figure is a post, not a tariff.</li>

</ul>

<ul>

<li><strong>Bank of Canada, 28 October.</strong> A new Monetary Policy Report. Council has flagged rising upside inflation risk, and some market pricing briefly leaned toward an increase rather than a cut.</li>

</ul>

<hr />

<p class="nl-source">Published by OCAL Financial Inc. TSXV: OCAL. The OCAL Signal is issued monthly on the 15th and covers the preceding calendar month. Issue No. 2 covers 1 to 31 August 2026. Research closed and information current as of 16 September 2026. © 2026 OCAL Financial Inc.</p>