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Lower vehicle price inflation is providing significant relief to embattled consumers, says TransUnion South Africa. Its Vehicle Pricing Index (VPI) for new and used vehicles shows prices dipping significantly to 2.6% and 2.5% in the second quarter of 2018.
This follows the 5.4% and 3.6% recorded in the same period last year. The VPI for new passenger vehicles has dipped below inflation for the fourth consecutive quarter.
Factors determining prices
Despite this positive news, TransUnion cautions that the industry is at a sensitive point in the cycle, with a weak rand, potentially higher interest rates and global trade wars likely to weigh on imported component costs being pushed on to consumers in the months ahead.
READ: 'SA car prices extremely sensitive to currency instability' - TransUnion
Head of TransUnion Auto in South Africa, Kriben Reddy said the current pricing trends are nevertheless "very good news" for consumers as some car brands have managed to reduce their prices over the past 12 months.
New car sales are finally on the rise after a grim phase of decline. March saw growth in new unit sales of 3.7% and April delivered 3.6%. One reason for this improvement is made clear by the TransUnion New Vehicle Price Index which has only risen 2.3% in Q1 2018.
The price of new cars has been held very low for some time in an effort to attract buyers who have also been helped by a stronger rand, low inflation and a reduction in interest rates.
People want newer cars
Dealers are also clearly lowering their margins to shift metal.
In the used vehicle market, the TransUnion Q1 report shows 46% of used vehicles sold are under two years old, and 9% were demo models, which indicates consumers are opting for “newer” old vehicles. Sellers should time their decisions to sell to meet this market imperative.
It needs to be made clear that the used car market is not in serious decline - it still outweighs the new car market in SA by more than 2:1, it still offers a better price increase average and the economy has a long road to travel before anyone would call it the kind of cash flush or easy loan boom time which turbocharges new vehicle sales.
But it’s clear that we are in a cyclical turn towards new vehicles which I suspect will continue as long as the dealers keep the current lid on price increases.
For instance, the new Polo Vivo 1.4 is 3.6% less expensive than a year ago and the cost of a Hyundai Grand i10 Fluid 1.2 is down 2.9%. Other cars in the entry-level band show similar declines, with the Kia Picanto down 6.3% and the Ford Figo showing no inflation for 12 months.
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"At a time when consumers are feeling the pinch from price increases in areas, like fuel, as the economy struggles to gain ground, these lower prices provide significant relief," said Reddy.
Lower input costs, CPI inflation, reduced interest rates and competitive financing structures, together with the streamlining of some product lines, are among the reasons underpinning the current pricing trends.
Gradual percentage increases
TransUnion data show that total financial agreement volumes in the passenger market have increased from the second quarter of 2017 to the second quarter of 2018 by 7%. New passenger finance deals increased by 18% and used increased by 2%.
"These factors have offset the negative impact of fuel and VAT increases which make it ideal for consumers to enter the new vehicle market," said Reddy.
The used-to-new ratio, meanwhile, decreased from 2.41 in Q2 2017 to 2.05 in Q2 2018. "In the used vehicle market, the make-up of used vehicle sales has shown that 43% are under two years old and 9% were demo models, which indicates consumers are opting for under 2-year-old vehicles," continued Reddy.
Following a trend
Notably, TransUnion research shows that even certain luxury brands have reined in price increases. For instance, the Mercedes E-Class has lifted only 0.9% and the Volvo XC60 has shown no inflation over the past 12 months.
While the current risks to the export and component import market are high due to global trade wars, Reddy does not expect to see a major impact in the next few months. However, he cautioned that there is likely to be a lagged effect as tariff changes in certain geographies take effect over the longer term.
"The US has kicked off the process of imposing a tariff on imports and in the short term, we will see an appreciation of the rand. This will directly affect SA’s GDP growth rate," he said.
Those manufactures who stocked up in advance and have forward cover are well placed. "They will need to relook their export markets to export at the same volumes and remain competitive," added Reddy.
TransUnion advises consumers to remain vigilant and keep a close watch on their affordability levels and credit health in current conditions. These volatile conditions could lead to a weaker rand, increased interest rates and could, therefore, place more strain on consumers who have not worked out their total cost of ownership.
"Consumers must still keep a very close watch on their credit health and do their homework before making a major credit decision like buying a car," concluded Reddy.
