New vehicle price inflation declines sharply

The rate of increase in new vehicle prices declined sharply to 2% in the fourth quarter of 2021 from 9.6% in the same quarter in 2020, with used vehicle inflation soaring from 2.9% to 7.% in the same period, according to the latest TransUnion SA vehicle pricing index.

TransUnion Africa auto information solutions vice president Kriben Reddy said the last time the new vehicle index was at this level was in the fourth quarter of 2011, while the used vehicle index has not been this high since the first quarter of 2004.

TransUnion said the new vehicle price index, which effectively measures the inflation rate for new vehicles, maintained “its freefall of the past 12 months in the final quarter of 2021, while used cars continued to get relatively more expensive in the face of changing consumer demand and supply”.

Exaggeration

However, economists say it’s an exaggeration to describe the decline in new vehicle price inflation as a “freefall”.

“It’s just that [vehicle] prices haven’t risen much,” said Econometrix chief economist Azar Jammine.

Economist Mike Schüssler said it is a slower rate of increase, not a “freefall” and not deflation.

Reddy said the high demand for quality used vehicles, combined with limited supply, is directly driving current used vehicle pricing trends in the market.

“Sourcing inventory has been a major issue, with consumers and fleets alike holding onto their vehicles for longer.

“With a long waiting list for new vehicles, consumers are opting for the used vehicle market and prices are not going to ease soon, as interest rates remain relatively low despite recent hikes,” he said.

Despite the pricing trends, South African consumers continue to buy more used than new vehicles with the used-to-new ratio remaining consistent year-on-year at 2.31 used vehicles sold for every new vehicle sold.

The index is created using vehicle sales data from across the industry, for new and used vehicles from a basket of passenger vehicles, which incorporates 15 top volume manufacturers.

Jammine attributed the lower vehicle price inflation largely to the strengthening in the value of the rand, and the increase in used vehicle price inflation to a pick up in demand for used vehicles.

“There has been an increase in people wanting used vehicles and there has been a shortage of stock.

“The new vehicle inflation figure is mainly linked to the fact that in 2020 the rand fell very sharply but in 2021 it strengthened over the course of the year,” he said.

New vehicle market insights

Schüssler said the monetary value of new vehicle sales in real terms shows that the new vehicle market is still below 2013 levels.

The value of sales totalled about R15 billion a month in 2013 but is now at about R11 billion a month, he said.

Schussler said an average of 45 000 passenger cars a month were sold in 2005/2006, but the average is now about 26 700 units.

“That puts it into perspective. New car sales are recovering but they are nowhere near record highs and not even on the average of the last 16 years,” he said.

Schüssler said manufacturers and dealers have probably come to the realisation that they cannot just push through price increases if they want to sell new vehicles, with the slight strengthening in the exchange rate probably also helping them to keep new vehicle price increases low.

He said the turnover of the used vehicle market is now as big as that of the new vehicle market, although a larger number of used vehicles have to be sold because they are cheaper.

“The reason for this is that people aren’t as rich as they used to be. The GDP per capita peaked in 2013 – and when people get poorer, that is what one can expect. People would rather buy a second- or third-hand vehicle,” he said.

Supply situation

TransUnion’s pricing index report said the global automotive industry overall had another challenging quarter sourcing inventory, with the South African market experiencing similar issues with the global chip shortage hampering new vehicle supply.

It said the used vehicle market’s lack of quality stock is driving high demand amid low consumer confidence, increasing consumer debt-to-income ratios, Covid-19 uncertainty, rising unemployment, adverse foreign exchange and added pressure on disposable income.

TransUnion said 33% of the used vehicles sold in the quarter are less than two years old but this percentage is continuing to decrease as the supply of quality used vehicles remains under pressure.

Demonstration models financed made up 5% of used financed deals in the quarter, down 1% from the previous quarter.

TransUnion said this indicates consumers remain in the market for older vehicles as quality supply diminishes and pressure on disposable income increases.

It said the industry overall is continuing its slow recovery from the effects of the Covid-19 pandemic and the civil unrest experienced earlier in 2021.

Total financial agreement volumes in the passenger market increased by 2.8% year-on-year, with new passenger finance deals up 2.6% despite the semiconductor shortage disrupting new vehicle supply chains.

Used passenger vehicle deals were up by 2.9%.

TransUnion added that consumer buying patterns showed that 47% of new and used financed vehicles are hatchbacks and 25% are sport utility vehicles (SUVs).

It said almost half of the vehicles financed are being bought by consumers between the ages of 26 and 40.

There was a change in percentage of new and used cars being financed in the various price categories in the fourth quarter, with activity moving from the under R200 000 bracket into the R200 000 to R300 000 bracket.

“This shows consumers are looking for value in the used vehicle market despite recent interest rate hikes,” it said.

Reddy said the car market is also seriously affected by the macroeconomic outlook, with the country towards the end of 2021 experiencing the first economic contraction after four consecutive quarters of growth.

“Consumer confidence remains below zero and the household debt-to-income ratio remains high, which puts significant pressure on consumers’ disposable income,” he said.

“As a result, many consumers will stay out of the new car market at this stage, despite its relative affordability.”