Rand tanking sees a surge in new car prices

New car price increases in South Africa – which, surprisingly, have lagged the country’s rising inflation rate – are now surging.

The latest TransUnion Vehicle Pricing Index released on Monday (5 December) shows that the rate of increase in new vehicle prices accelerated to 6.8% in the third quarter of 2022 from 3.8% in the third quarter of 2021.

This follows the rate of change in new vehicle prices surprisingly declining to 3.9% in the second quarter of this year, from 6% in the first quarter.

Although the rate of increase in new vehicle prices surged significantly in the third quarter, it is lower than headline consumer inflation, which edged up to 7.6% in October (September: 7.5%), after hitting a 13-year high of 7.8% in July.

During JSE-listed vehicle retailer Combined Motor Holdings’ interim financial results presentation in October, CEO Jebb McIntosh forecast that new vehicle prices were expected to increase by up to 10% within the next four months.

However, Toyota South Africa Motors dismissed this forecast, with president and CEO Andrew Kirby stating that Toyota believed that from a total industry perspective there would probably be moderate consumer price index- (CPI-) related new vehicle price increases in the country.

Econometrix chief economist Dr Azar Jammine on Friday attributed the sharp acceleration in new vehicle prices to the significant depreciation of the rand over the course of this year, especially against the US dollar.

He said new vehicle sales have held up amazingly strongly this year – given the rise in interest rates and the higher overall inflation rate – but there is bound to be a reduction in the growth in new vehicle sales because of the increase in prices.

Jammine said new vehicle sales have been supported greatly this year by increased tourism, which has resulted in very strong demand for new vehicles from rental companies.

Automotive business council Naamsa last week reported that South Africa’s new vehicle market registered its 11th consecutive month of year-on-year growth in November, with year-to-date sales, at 486 895 units, now 13.6% higher than the corresponding 11-month period in 2021.

Market starting to ‘normalise’

TransUnion Africa vice president of auto information solutions Kriben Reddy said the new car market is showing signs of normalising as supply levels stabilise, but that 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.

“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,” said Reddy.

“A moderation in transport inflation, thanks to fuel price decreases in August and September [and October, but with increases in November and December], offset a build-up in food and clothing price pressures. But we expect price inflation to remain sticky at elevated levels.”

Consumers under pressure

Reddy said TransUnion’s latest Consumer Pulse study revealed that more than half of South African consumers have cut back on their spending and expect to cut discretionary spending 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.

Transunion said the rate of increase in used vehicle prices rose to 9% in the third quarter this year, from 5.9% in the third quarter of 2021.

It said the ratio of used to new vehicles sold shifted significantly in the third quarter.

Reddy said a year ago, 2.41 used vehicles were sold for every new vehicle, but this declined to 2.1 in the third quarter of 2022.

“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,” he said.

Jammine attributed the decline in used vehicle sales relative to new vehicle sales to the shortage of quality used vehicles and the subsequent increase in used vehicle prices, which makes the value proposition of purchasing a new vehicle more attractive.

By Roy Cokayne

This article first appeared on Moneyweb and was republished with permission. Read the original article here.