Higher demand for used cars pushes up pricing in TransUnion VPI Q1 2015

The latest TransUnion Vehicle Pricing Index (VPI) shows that used car prices are still tracking very similar to new car prices, continuing the trend highlighted in the fourth quarter of 2014. Used car prices rose to 1.67% in Q1 2015, a 32-basis point increase over the previous quarter. New car prices jumped by 7.63% compared to 7.18% in Q4 2014. For the fifth quarter in a row, used car inflation has increased on a year-on-year basis.

“As indicated by previous VPI results, used car price inflation typically lags behind new car price inflation, in other words when new car prices increase, a subsequent rise in used car prices only follows in later quarters,” said Kriben Reddy, director product of TransUnion Auto Information Solutions. “However, for the past few quarters we have seen these two indexes following the same trend whereby they are increasing almost simultaneously. A volatile exchange rate has led to continued inflation on new vehicles. Furthermore, continued economic pressure coupled with rising costs of living, have decreased consumers’ disposable income. This is driving higher demand for used vehicles, which in turn, pushes up used car prices.”

Records of financial registrations indicate that the current ratio of new to used financed vehicles is around 1.7 for the month of February 2015, above the average of 1.64. This indicates higher demand for used vehicles, continuing a trend that first appeared in the first quarter of 2014.

The rise in new car prices has increased more than the price of used cars in the last quarter. While the VPI traditionally tracks the Consumer Price Index (CPI), this quarter shows the two indexes diverging. The CPI measures changes in the price level of consumer goods and services purchased by households, and typically follows the same trend as the VPI – in other words if one increases, so does the other.

According to Rudolf Mahoney, head of research and PR at Wesbank, “The main drivers behind this phenomenon are the performance of the Rand as well as the price of oil. Whilst the Rand continues to lose value and depreciate to record lows, 75% of the vehicles sold in the local market are imported and therefore exposed to currency risk. It is for this reason that the VPI continues to rise.”

Mahoney also stated that the price of oil halved and traded at very low prices, however, this was short-lived. Oil and fuel prices have a significant impact on the headline inflation, or the total inflation, of the South African economy, and thus the divergence of VPI and CPI. Besides the direct impact of lower CPI, the South African Reserve Bank (SARB), whose main function is that of using interest rates as a mechanism to target inflation, will most likely not hike interest rates for the remainder of 2015.

“These figures are indicative of continued economic pressures, as used car inflation continues on a steeper climb than in previous quarters. With the impending introduction of a greatly increased fuel levy and the rising cost of electricity, these pressures are unlikely to ease up any time soon. This will further drive demand for used vehicles as consumers struggle to reduce their car repayments, potentially pushing prices up even further. However, these trends are in line with normal business cycles, and once again the quarter does not indicate anything statistically significant,” Reddy concluded. *TransUnion publishes the VPI on a quarterly basis. The vehicle risk intelligence company calculates the VPI from data it receives on monthly sales returns from thousands of dealers throughout the country, as well as vehicle financing registrations from all of the major banks and vehicle finance houses.