After Record Lows, South African Car Market Shows Signs of Recovery

The South African car market showed signs of resilience in Q3 2020, bouncing back from an all-time low Q2 to record month-on-month increases in the number of new and used cars financed in August and September, according to the latest TransUnion SA Vehicle Pricing Index (VPI).

While total financial agreement volumes in the passenger market showed an expected 21% year-on-year decline from Q3 2019, the market overcame rising vehicle prices, difficult trading conditions and uncertainty to record 35% and 45% month-on-month increases in August and September respectively, albeit off a low base. This suggests that while challenging times still lie ahead, the industry could be on the road to recovering from the total shutdown caused by the COVID-19 pandemic, said Kriben Reddy, vice president of auto information solutions for TransUnion Africa.

“Overall, the global automotive industry has had another challenging quarter. In South Africa, it has been a quarter of gradual recovery in terms of business and consumer confidence, new vehicle sales, finance applications and overall demand. While the automotive industry is not yet out of the woods, the small gains made towards the end of the quarter off the back of record lows in Q2 is a real positive for the industry,” said Reddy.

Vehicle prices continue to rise, with the VPI showing that new vehicle pricing rose above inflation for a second successive quarter. The VPI for new vehicles moved to 7.6% in Q3 2020, from 3.3% in the same period last year, with the used vehicle VPI rising to 2.3% from 1.1% in Q3 2019. This follows 10 quarters of vehicle price increases remaining below inflation, and could herald a cycle of further increases, said Reddy.

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. The index is created using vehicle sales data from across the industry.

“In South Africa, new vehicle pricing is not driven by demand. As around 70% of our vehicles are imported, factors like exchange rates and tax duties play a big part in the price hikes. The used car market, on the other hand, is entirely-demand driven, so the fact that we’re seeing a rise in the prices of used cars shows a clear increase in demand for second-hand vehicles,” said Reddy.

The used-to-new ratio increased marginally from 2.31 in Q3 2019 to 2.35 in Q3 2020. This means that for every new vehicle financed, 2.35 used vehicles are financed. The make-up of used vehicle sales shows that 36% of vehicles 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.

The percentage of cars (new and used) being financed below R200 000, R200 000 to R300 000 and over R300 000 has seen a movement back towards vehicles over R300 000 in Q3 – the highest since TransUnion started tracking in 2011. While this could be seen as a positive sign, it is also indicative of segment movements through higher vehicle pricing, premium brand used vehicles financed and a shift of consumers purchasing bakkies.

Reddy said the fact that interest rates had dropped to an all-time low could assist some consumers from an affordability point of view, although lenders facing high delinquency rates would need to manage key metrics to minimise their risk by amending thresholds of loan to value ratios, loan terms and balloon payments. “Consumers and dealers need to be cognisant of the vehicles they purchase or stock, due to de-fleeting and possible vehicle repossessions as a result of defaults on repayment agreements in the upcoming months,” he said.