Vehicle imports from the United States have surged as the Canadian dollar climbed above parity with the U.S. greenback, pressuring sales in Canada, as well as prices for new and used vehicles, according to a released today by Scotia Economics.

Canadians imported a record 137,000 new and used vehicles from the United States through October, 21% above a year earlier, according to data from the Registrar of Imported Vehicles.

“The import surge was particularly striking in October, with Canadians importing a record 24,873 vehicles into Canada, double the level of a year ago and a 68% increase from the previous month,” says Carlos Gomes, Bank of Nova Scotia’s auto industry specialist. “The import surge and vehicle price differential between Canada and the United States reflect the rapid appreciation of the Canadian dollar, and are not due to increases in the manufacturers’ suggested retail price (MSRP) in Canada.

“In fact, Canadian new car prices were flat between 1998 and 2006 and have declined by 5% so far this year,” adds Gomes. “This reflects the fact that while manufacturers have not adjusted their MSRPs in Canada, they have enhanced incentives and have been offering better lease and financing deals. As such, transaction prices have fallen, led by an eight% decline for North American-built light trucks.”

While MSRPs on many vehicles remain $4,000-$5,000 higher in Canada than in the United States, the decline in new vehicle prices in Canada has intensified since the spring, leading to lower prices for used vehicles, especially one-year old models. As of early November, the Scotiabank Used Car Price Index had fallen 5% below a year earlier, led by an 8% drop in the price of one-year old models.

The potential impact on used car prices and residual values is the main reason why automakers are reluctant to reduce MSRPs, especially since the number of vehicles coming off-lease is set to jump to a record 550,000 units in 2008, up from a five-year low of 470,000 units last year, and nearly triple the current level of imports from the United States. Furthermore, the number of vehicles coming off-lease next year represents a record 14% of the entire Canadian market (new and used sales), suggesting that increased supply will pressure residual values.

However, recognizing that Canadians are demanding lower vehicle prices in view of the deals available in the United States, automakers boosted incentives further earlier this month, offering discounts up to $10,000 on selected models in an attempt to entice Canadians to move off the sidelines and buy vehicles at home. Some manufacturers have also recently announced lower prices for their all-new 2008 models.

“Looking forward, the auto sector will continue to experience disinflation even if automakers hold off on lowering MSRPs. This reflects the fact that with macro economic trends continuing to weaken in the United States, used car prices will face downward pressure south of the border,” says Gomes. “This should further bolster imports into Canada, provided that the Canadian dollar remains close to parity, a good bet given Canada’s comparatively strong economic fundamentals.”