The rate of increase in new vehicle prices is dropping

While consumers looking to trade in their old vehicles will find dealers willing to pay top dollar for quality cars.
Swings and roundabouts: In Q3 new vehicle inflation halved from the same period in 2020 while for used vehicles it more than doubled. Image: Mikael Sjoberg/Bloomberg

The rate of increase in new vehicle prices is going down despite demand exceeding supply because of the problems caused by the global semiconductor shortage.

TransUnion Africa reported on Tuesday that South Africa’s local car market saw a significant shift in pricing trends in the third quarter of 2021.

It said the new vehicle price index, which effectively measures the inflation rate for new vehicles, halved from the same period in 2020 while the used vehicle index more than doubled in the face of changing consumer demand and supply issues.

New versus used

The latest TransUnion SA Vehicle Pricing Index (VPI) revealed that the rate of increase in new vehicle prices slowed from 7.6% in the third quarter of 2020 to 3.8% in the third quarter of this year.

In the same period, the rate of increase in used vehicle prices soared from 2.3% last year to 5.9%.

Source: TransUnion Africa

The VPI measures the relationship between the increase in vehicle pricing for new and used vehicles from a basket of passenger vehicles which incorporates 15 top volume manufacturers.

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TransUnion Africa auto information solutions vice president Kriben Reddy said the shift in new vehicle pricing trends is being driven by a combination of changing consumer demand and supply issues in the new car market, where the global computer chip shortage continues to affect motor manufacturers.

“As a country, we import around 70% of our cars, so we’re definitely feeling the effects of the shortage – and there’s no clear end in sight,” he said.

Reddy said that with the shortage of new vehicles and demand exceeding supply, there should be a continuous increase in new vehicle prices.

He said there would have been some forward buying of new vehicles by SA-based original equipment manufacturers (OEMs) and distributors, which could have had some impact on vehicle pricing.

But Reddy believes OEMs at certain times, under normal circumstances where the industry is not faced with supply issues, attempt to “almost self-correct vehicle pricing” when prices get to a threshold where it is detrimental to sales.

Perspective

Reddy said the decline in the rate of increase in vehicle prices looks aggressive from a year-on-year perspective but it has actually been quite a gradual slowdown on a quarter-on-quarter basis.

“It tells me it is almost like a self-correction mechanism that the OEMs use to stimulate sales,” he said.

However, Econometrix chief economist Azar Jammine said a very important contributor to the slowdown in new vehicle pricing trends is that the rand depreciated sharply in the second quarter of 2020 and then started recovering up until the second quarter of 2021.

Jammine said the US dollar was quite strong over this period, which meant the rand gained quite a lot of ground against the currencies of other countries from which South Africa imports parts and components, especially in Euros and British pound.

Good news for buyers and sellers

Reddy said the dramatic shift in pricing trends and patterns in the past year is good news for beleaguered consumers.

He said new vehicles are now not only relatively more affordable but consumers will also benefit from a range of incentives currently being offered by manufacturers to try and stimulate the market.

In addition, those consumers looking to trade in their old vehicles will find dealers willing to pay top dollar for quality cars, with a growing shortage of used vehicle stock in the country, he said.

Reddy added that although consumers will be paying higher prices for used vehicles than a year ago, they will likely be getting a better quality vehicle for their money because many consumers continue to trade down and/or reduce the number of vehicles in their households.

He said there is also a growing trend of consumers downgrading from a two-car household and opting for one slightly more expensive vehicle, such as trading two sedans for one sport utility vehicle (SUV).

Reddy said this trend is expected to continue in the upcoming months as vehicle prices increase in real terms.

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“The macroeconomic outlook has improved dramatically, with annualised positive GDP growth of 19.3% in the second quarter of 2021, which is up from -3.2% in the first quarter of 2021.

“Consumer confidence still remains low and household debt-to-income ratios remain high, which puts significant pressure on consumers’ disposable income.

“We’re in an interesting and rapidly changing market, where new and quality used vehicles are in short supply at a time when consumers are looking for the best value for money,” said Reddy.

“The pressure on the quality used car market will continue until prices become too expensive in relation to new vehicles. The industry will continue to operate in a challenging environment for the foreseeable future.”

Used-to-new ratio

TransUnion reported that the used-to-new ratio increased year-on-year from 2.35 in 2020 to 2.4 in 2021, which means that 2.4 used vehicles are sold for every new vehicle.

Reddy said the ratio is swinging further in favour of used vehicles but suspects the start of the shift back towards new vehicles will commence in the next two to three quarters.

But Reddy said the challenge consumers will face is whether they will be prepared to wait for a new vehicle because of the stock shortages.

He believes some consumers will switch instead to a one-year-old vehicle.

However, Jammine believes a slow shift back to new vehicles has already begun.

“That is one of the reasons why new car sales have not been too bad recently,” he said.

TransUnion said 35% of used vehicles traded in are less than two years old, which continues to decrease as the supply of quality used vehicles remains under strain.

It said demonstration models that were financed accounted for 6% of used vehicle finance deals in the third quarter of 2021, which indicates consumers are opting for older vehicles as quality supply diminishes and pressure on disposable income increases.

However, there was more activity in both the new and used vehicle market for vehicles that were financed in the over R300 000 bracket than below R200 000 and in the R200 000 to R300 000 price bracket.

Reddy attributed this to ongoing price increases which have pushed many new vehicles over the R300 000 price point.

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Car OEMs are exploiting the RSA consumer.. Porsche carrera S launched for R1.5M a year ago and is now R2M???

BMW 4 series new is at R1M… Insane.. its all in the financing.. vehicle dealerships are slowly becoming banks… thats where the money is… in the financing.

End of comments.

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