New vehicle price inflation continues to slow down

These factors have resulted in an increasing demand for used cars, with the VPI showing that the ratio of new to used vehicles financed has marginally widened from 1.81 (that is one new vehicle to every 1.81 used vehicles financed) to 1.83 on a year-on-year basis.

While the overall CPI increased from 4.1% to 4.3% in Q3 of 2015, new car inflation softened from 6.91% to 6.58%. Used car price inflation was also down during the period from 1.53% to 1.44%.

"The impact of macro-economic factors is clearly evident in vehicle sales, with both new and used vehicles showing a slight slowing down in price increases compared to Q2, a direct result of struggling sales volumes of new vehicles and a struggling economy," says Derick de Vries, CEO of auto information solutions at TransUnion.

Price increases

De Vries says that new car dealers have not been helped by the continued weakening of the rand in the third quarter of 2015, which forced manufacturers to effect new price increases that are well above CPI rates. "In order to stimulate sales, extra incentives are offered to consumers to buy and to mitigate the increase in pricing. If there are a lot of vehicles in the system as a result of depressed sales, price inflation will continue to decrease."

Market leader in vehicle finance, WesBank, concurs. "These marketing incentives have done a great deal to minimise the sales decline in the new vehicle market. Dealerships are managing to keep consumers coming back and getting them into new cars - it's helped keep the replacement cycle relatively flat in an otherwise challenging market," says Rudolf Mahoney, head of brand and communications at WesBank.

De Vries adds that stockholding will become problematic for dealers if declined sales continue and manufacturers increase the stockholding days. "The new vehicle market is highly competitive and consumers are spoiled for choice, which is challenging dealers to still hold reasonable margins. The question remains - for how long can manufacturers provide sales assistance on new vehicles and what will the impact be if they take this away? The reality is that consumers will continue to seek more affordable vehicles, of which there is abundance in the used market."

Used vehicles

De Vries says that although marketing initiatives are stimulating new car sales, consumers are still seeing better value for money in buying used vehicles. "With household debt rising, consumers still aspire to drive a new vehicle, but simply can't afford it. Many are prepared to settle for a used vehicle that is cheaper with higher mileage or with more extras."

WesBank's data corroborates this growing trend in the used market. Mahoney adds: "We measure demand through the number of finance applications received. More and more consumers are applying for finance on used cars than people applying for new car finance. Those applying are also structuring their contracts to make repayments more affordable. Contract periods are being maxed out, with the average at 69 months, and we're seeing more demand for balloon payments too."

De Vries says that based on the data, TransUnion does not expect any change in this trend for the rest of this year or next. "We anticipate vehicle sales figures to continue being soft in 2016, which is reflective of the overall weakness of the economy, together with the forecast of subdued growth in GDP."

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