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Shift from new to used cars

Johannesburg - The value of the rand against foreign currencies is likely to have a greater impact on the new vehicle market this year, than the current interest rate cycle, according to Chris de Kock, CEO of WesBank.

“This will be felt in continued increases in new vehicle prices and is likely the biggest factor in the shift from new to used vehicles,” said De Kock.

New vehicle sales continued its downward trend in February despite an apparent increase in demand.

The National Association of Automobile Manufacturers of South Africa (Naamsa) reported sales down 3.1% year-on-year.

SA’s total new vehicle market ended February on 51 814 units. Passenger car sales were 5.4% down on February 2013 and light commercial vehicles (LCVs) marginally up 0.9%.

Exports continue to remain under pressure, 19.4% down year-on-year as the knock-on effects of supply continue to be felt.

Despite the market’s performance, WesBank’s book indicates an increase in consumer demand year-on-year with numbers of applications increasing 5.7% over February 2013.

WesBank anticipates the demand for new vehicle finance to remain robust having experienced a 2% increase year-on-year, whilst demand to finance used vehicles rose 7.7%.

Year-on-year the demand for finance remains strong despite an increase in interest rates at the beginning of this year.

“As previously experienced, we don’t expect interest rates to spike and, while gradual increases are inevitable to curb inflation and to counter the volatility in exchange rates, it is important to remember that rates remain at historical lows,” said De Kock.

"Whilst consumers are shifting from the new to used vehicle market – finding better value in the used rather than the new market – companies are buoying the new commercial vehicle sales in general."
 
Average contract period  

The WesBank book indicates that the average contract period entered is 69 months, with increasing demand for balloon payments at the end of the contract period.

"Increasing numbers of applicants are also capitalising on the low interest rate cycle by opting for fixed interest rates," said De Kock.

"Optimising the flexibility of finance agreements to make their monthly installments as affordable as possible remains prevalent."

Despite being financed over a longer period, replacement cycles remain relatively lower at 35 months.

“The impact of the National Credit Act over the past few years has resulted in more financially savvy consumers, who are applying for credit in line with what they can afford, leading to a better quality of applicant," said De Kock.

WesBank foresees strong growth in the used car market, in line with the demand shift for more affordable motoring.

"The used-to-new ratio has remained stable at 1.25% in favour of used, creating a robust combined market for dealers," said De Kock.

Impact of the rand

The current weakness in the rand will have a mixed (negative and positive) impact on the current vehicle industry, according to Sydney Soundy, head of Standard Bank vehicle and asset finance.

On the negative side, the weak exchange will have an impact on the price of imported vehicles along with the price of various imported components, he said.

"With 60% of all vehicles sold in South Africa being imported and 75% of all Passenger vehicles imported, new vehicle price inflation is likely to experience relatively higher growth this year than was the case last year," said Soundy.

"On the positive side, the export market may be boosted by the weaker rand."

Increased costs of running a vehicle

The Minister of Finance announced in his 2014 National Budget that the general fuel levy and Road Accident Fund levy will increase by 12c and 8c per litre respectively, effective from April 2.

This will result in an additional 20c per litre on fuel costs being passed on to motorists.

The announced fuel levy increases come on the back of increased fuel prices in recent years.

"A further increase of 36c and 28c on petrol and diesel respectively effective March 5 will result in effective fuel increases of 84% (petrol) and 94% (diesel) since January 2010," said Soundy.

"Filling up a vehicle with a tank capacity of 50 litres has increased by approximately R320 since January 2010."

The recently implemented toll fees in Gauteng have also added to the cost of running vehicles.

"The consumers will absorb the abovementioned increases in addition to the increase in vehicle finance instalments/repayments following the hike of 0.5% in interest rates at the end of January 2014," said Soundy.

"The general advice for consumers to be cautious and responsible when taking up lending facilities remain increasingly relevant today, as has been the past."

- Fin24

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