New vehicle prices rise sharply above inflation despite sales slump

New vehicle prices rise sharply above inflation despite sales slump

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New vehicle price inflation rose sharply to 6.5% in the second quarter from 3.1% in the same quarter in 2019 despite new vehicle sales nosediving because of the Covid-19 lockdown and its impact on the financial health of households.

Read: SA car sales at record low

TransUnion Auto Information Solutions said on Wednesday this is the first time since the second quarter of 2017 that new vehicle prices rose at a rate above inflation.

Statistics South Africa reported on Wednesday that headline consumer inflation edged up marginally to 2.2% in June from 2.1% in May.

Kriben Reddy, head of Auto Information Solutions for TransUnion, said the bulk of the new vehicles that are sold in South Africa are imported, which means the biggest driver of the price increase is the strength of the rand.

Reddy said a similar situation occurred in 2007-2009 when the exchange rate of the rand was volatile, resulting in above-inflation price increases. “That is exactly what is coming through now,” he said.

Cycles

Reddy added that a lot of the dealer groups or original equipment manufacturers (OEMs) take forward cover when they import or are planning their stock levels, but some of those cycles will have come to an end.

As they restock now, this is when the price increases come through, he said.

Econometrix chief economist Azar Jammine said TransUnion’s new vehicle price inflation figures tie in with the Consumer Price Index (CPI) figures for June released on Wednesday, which showed quite a sharp increase in new vehicle prices.

Jammine echoed Reddy’s view of the cause of the price increases.

He said the rand has depreciated sharply this year, although it rallied somewhat this month, but prior to July was trading “somewhere north of R18 to the US dollar and at one point above R20 to the euro and above R23 to the pound”.

“So vehicle input costs have soared. Businesses can take forward cover and insulate themselves from the impact of a currency depreciation for a time but when those forward exchange rate contracts mature, then those companies are faced with a significant increase in the cost of their inputs.

Monopolistic

“You might say there is no demand but this is what happens where you have a fairly monopolistic environment where businesses will still pass on those cost increases to consumers even if it means lower sales at the end of the day,” he said.

TransUnion reported on Wednesday that used vehicle prices had also increased to 3.1% in the second quarter of 2020 from 1% in the same quarter in 2019.

Used vehicle prices have increased despite vehicle rental companies indicating that they will be embarking on significant defleeting programmes, resulting in increased availability and supply of used vehicles in the market.

These companies are taking this action because of the massive impact of the Covid-19 regulations on the travel and tourism market, which has significantly dented the demand for rental vehicles.

Reddy attributes the increase in used vehicle price inflation to shifting consumer buying patterns from new to used vehicles and the increased availability of good quality, clean and well maintained used stock of not very aged vehicles, particularly from car rental companies.

He said the financial impact of the pandemic, which has seen the unemployment rate rising above 30% in South Africa, has resulted in consumers either forgoing vehicle purchases or looking to buy down from new to used vehicles.

Read: Troubling car instalments when finances bite

TransUnion reported that the used-to-new vehicle ratio has been trending upwards post-lockdown from an average of 2.16 used vehicles for every new vehicle sold in 2019 to 2.31 used vehicles for every new vehicle sold in the second quarter of 2020.

Reddy said the make-up of used vehicle sales shows that 33% of those financed are under two years old, with demo models making up 6% of used financed deals.

“This indicates consumers are opting for older vehicles as pressure on disposable income increases,” he said.

Jasmine said the rate of increase in used vehicle prices is still quite low and suspects that new and used vehicle supply and demand is not affecting pricing and the rate of increase in prices.

Don’t expect big discounts

He doubts car rental companies will be offloading vehicles from their fleets at hugely discounted rates “and that again is due to the monopolistic nature of the South African economy”.

“Typically in a free market that would happen and you would drop your prices to the point where customers start buying but that is not happening in South Africa.

“People are using their vehicles less and there also might be an increase in the supply of used vehicles [from individuals] to generate a bit of cash for consumers who might be in dire straits,” he said.

“But even the used vehicle market has become concentrated in the hands of WeBuyCars and a few other companies.”

TransUnion said the signs of consumers’ purchasing power growing marginally throughout 2019 has been pushed back post-lockdown and expects this trend to continue through 2020 as sentiment around the market continues to deteriorate.

It said there has been a clear movement towards new and used cars priced at under R200 000 in finance agreements concluded in the second quarter of 2020.

Reddy said it took 24 months for the car market to recover after the previous global recession in 2007-2009.

“What is critical is how long it will take consumers to recover from the economic effects of the lockdown. The longer the constraints of Covid-19 continue, the greater the impact on the industry and the broader economy,” he said.

Reddy said TransUnion’s ongoing Financial Hardship research shows that consumers on average expect to be just over R7 000 short on their budgets every month, which is more than the cost of ownership of an entry level car.

“This might keep a lot of people out of the market for even longer,” he said.

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Credit: Moneyweb

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