New car price increases not keeping up with inflation

Surprisingly, new car price increases in South Africa continue to lag the country’s rising inflation rate.

The latest TransUnion South Africa Vehicle Pricing Index (VPI) reveals that the rate of change in new vehicle prices declined to 3.9% in the second quarter of this year from 6% in the first quarter.

However, the rate of change in used vehicle prices soared to 8.3% from 4.9% in the same period to continue the trend of used vehicles becoming relatively more expensive.

Vehicle Pricing Index Q2, 2022

Statistics SA reported on Wednesday that headline consumer inflation accelerated to 7.8% in July, the highest level since May 2009, from 7.4% in June.

Econometrix chief economist Azar Jammine said the lag in vehicle price increases to rising inflation is a classic example of vehicle manufacturers not wanting to lose sales and also explains why new vehicle sales are holding up so well on a year-on-year basis.

The latest quarterly review of business conditions in the new vehicle manufacturing sector released this week by automotive business council Naamsa revealed that total new vehicle sales dropped by 13.8% during the second quarter of 2022 compared with the first quarter, but were 4.7% higher than the second quarter of 2021.

Factors behind sales slowdown

Naamsa CEO Mikel Mabasa attributed the slowdown in momentum in new vehicle sales between 2022’s first and second quarters to the impact of the severe floods in KwaZulu-Natal on vehicle production and sales, logistical import and export challenges at the Durban port, and a weak economic climate.

Jammine cited increased inflation and declining affordability because of higher interest rates as a major factor in the loss of momentum.

He said the first quarter of each year “contains that spurt of new vehicle sales” and seasonality could also be a factor in the decline in sales between the two quarters.

“But one of the reasons why year-on-year new vehicle sales are holding up surprisingly well is that vehicle manufacturers are taking a hit on their margins to continue selling vehicles,” he said.

Financing indicators

TransUnion Africa vice president of auto information solutions Kriben Reddy said South Africa’s automotive industry continued its recovery from Covid-19 in the second quarter, with the number of finance deals hitting levels last seen before the pandemic struck.

He said the number of new passenger vehicle finance deals increased 34% year-on-year compared with 5.4% for used passenger vehicles.

However, Reddy cautioned that the increased vehicle sales numbers have to be taken in context and lagging indicators, such as rising interest rates, could still impact the industry going forward.

“The market is heading in the right direction but we have to remember that a year ago we were in the midst of Level 4 lockdowns and civil unrest, which depressed the market severely.

“We’re also almost certainly going to see the impact of rising inflation and interest rates at a time when household incomes are not growing at the same levels,” said Reddy.

Naamsa’s quarterly review revealed that domestic new vehicle production declined by 17% in the second quarter compared to the corresponding quarter 2021.

Average production capacity utilisation for passenger cars slumped from 86.3% in the first quarter to 61.1% in the second quarter, and for light commercial vehicles dropped from 63.1% to 46.3% in the same period.

Mabasa said the massive decline in light commercial vehicle production could be attributed to the impact of the severe floods in KwaZulu-Natal, the temporary closure of the Toyota Prospecton plant, and the ongoing global shortage of semiconductors affecting vehicle production.

Read:
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Jammine said what distinguishes South Africa so dramatically from countries like the US and UK, where vehicle manufacturers simply hiked prices exorbitantly as people went back to driving after Covid-19, is that South African manufacturers were unable to do the same without losing sales.

He said this partly explains why South Africa’s inflation rate, even at 7.8% for July this year, is lower than the US’s 9.1% and Britain’s 10.1%, despite a weaker currency.

But Jammine believes there is bound to be some increase in new vehicle inflation in the second half of the year, despite the current limited pricing power of manufacturers.

He said people will stop buying cars if prices are increased too sharply, especially now that interest rates have risen further and will increase even more.

“A vehicle is the one product that is vulnerable and very sensitive to interest rate movements,” said Jammine.

“Manufacturers cannot afford to increase prices too much. But we have had some currency depreciation so you will see a little bit of pricing.”

TransUnion said there was a clear movement in the second quarter in the percentage of new and used cars being financed below R200 000 from the over-R200 000 price brackets.

“Consumers continue to look for value in the used vehicle market, and recent interest rate hikes have not yet affected the numbers of consumers looking to purchase,” Reddy said.

TransUnion said the ratio of used to new vehicles sold shifted significantly in the second quarter because of these pricing trends.

Reddy said 2.67 used vehicles were sold for every new vehicle in the second quarter of 2021 but this declined to 2.1 in the second quarter of this year.

“In the used vehicle market, 27% of cars sold were less than two years old, and this continues to decrease as the supply of quality used vehicles remains under pressure.

“Demo models financed made up 4% of used financed deals, which indicates consumers are opting for older vehicles as quality supply diminishes and pressure on disposable income increases,” he said.