Vehicle Prices Continue to Rise, Even as Recession Looms
The prices of used vehicles continued to surge in the third quarter of the year, recording a 14th successive quarter of growth, but the new car market is showing signs of normalising as supply levels stabilise. However, this may not be enough to ward off a possible slowdown in car sales as consumers look to cut discretionary spend in the face of inflationary pressures and rising interest rates, according to information and insights provider TransUnion.
TransUnion’s latest Vehicle Pricing Index (VPI) showed the vehicle price inflation of new vehicles rose sharply year-on-year, moving from 3.8% in Q3 2021 to 6.8% in Q3 2022, with the used vehicle index rising from 5.9% to 9% in the same period. In contrast, South Africa’s overall inflation rate eased to 7.6% in August after hitting a 13-year high of 7.8% in July.
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.
Overall, the number of financial agreements in the passenger vehicle market continued their long climb back towards pre-pandemic levels, increasing by 8% year-on-year. New vehicle volumes soared 21% in this period, compared to a 3% rise in used vehicle volumes. Kriben Reddy, vice president of auto information solutions at TransUnion Africa, says this was partly due to consumers re-entering the market as new vehicles became more readily available following supply chain issues.
“The challenge the industry faces is that now that dealers have largely solved supply issues, there’s going to be an increasing demand problem as the effects of inflation and interest rates start to bite into consumer wallets. A moderation in transport inflation, thanks to fuel price decreases in August and September, offset a build-up in food and clothing price pressures, but we expect price inflation to remain sticky at elevated levels,” said Reddy.
According to TransUnion’s latest Consumer Pulse study, more than half of South African consumers have cut back on their spending and expect to cut discretionary spend even further in the coming months. One consequence of this is that consumers will hold onto their cars for longer, and the industry is going to have to get creative to get them back into the market, said Reddy.
The ratio of used to new vehicles sold shifted significantly in the past quarter. A year ago, 2.41 used vehicles were sold for every new vehicle; in 2022 Q3, this declined to 2.1. In the used vehicle market, 25% of cars sold were less than two years old, and this continues to decrease as the supply of quality used vehicles remains under pressure. Demo models financed made up 4% of used financed deals, which indicates consumers continue to opt for older vehicles as quality supply diminishes and pressure on disposable income increases.
Consumer buying patterns showed that more than one in three (34%) of new and used financed vehicles are hatchbacks, while more than one in five (21%) are SUVs. Sedans have retained market share, although this is mainly in the used vehicle market, where supply is constrained. Consumers between the ages of 26 and 40 bought nearly half of all vehicles financed, of which most were used.
The price points of cars (new and used) being financed has seen upward movement year-on-year, with a clear move from under R200 000 into the over R300 000 bracket. This is partly because there are a limited number of quality vehicles available under R200 000, given the high demand in the market and limited supply. This lack of supply has also contributed to consumers migrating from the R200k-R300k band to over R300k as consumers continue to look for value in the used vehicle market, with quality used vehicles increasingly difficult to source.
While fuel prices remain volatile, Reddy says all indications suggest that transport inflation should continue to moderate towards the end of the year. According to the SA Reserve Bank’s (SARB) latest Monetary Policy Review, elevated costs across the board mean that price inflation will remain high over the coming months, with the headline rate only expected to dip below the upper-end of the SARB’s target range (3%-6%) in Q2 2023. Overall, inflation is expected to average 6.5% in 2023, compared to 4.5% in 2021.
“What’s becoming clear is that the South African automotive industry can’t rely on traditional vehicle ownership to drive itself forward. While the market is still dominated by a vehicle ownership-based model, the real opportunity going forward lies in enabling alternative mobility models such as subscription services, which open up entirely new audiences and segments to the industry, and create opportunities for broader mobility inclusion,” said Reddy.
The TransUnion Africa Vehicle Price Index (VPI) measures the relationship between the increase in vehicle pricing for new and used vehicles, and uses vehicle sales data collated from across the industry.