Used car market to lead the way

That was the message from Mike von Höne, CEO of vehicle risk intelligence company TransUnion to representatives of the motor and associated industries at the TransUnion Auto Trends Forum in Sandton recently.

According to Von Höne, expected improved sales volumes in the coming months would enable the battered dealer market to restore profitable growth and rebuild their balance sheets, provided dealers managed the anticipated uptick without incurring additional overheads.

Von Höne based his cautiously optimistic evaluation of trends in the new and used car markets on data drawn from TransUnion's database of information on almost 12-million vehicles obtained from manufacturers, importers and distributors of over 100 vehicle marques, as well as 53 financial providers and 35 000 dealer submissions received by the company every month.

Substantial rise in finance registrations

He said that indications of a turnaround in the car market, underscored by the fact that NAAMSA statistics for new car sales for the first two months of 2010 were 18,0% ahead of the corresponding two months in 2009, was supported by increasing volumes of vehicle finance registrations data for both new and used vehicles.

Together, new and used vehicle finance registrations were up by 29% year-on-year in January, and 10% year-on-year in February.

Used vehicle financing registrations alone were up 18% and 15% in the first two months of 2010 respectively.

“TransUnion's expectation is that this trend will continue based on the fact that that although consumers are remaining cautious, the benefits of stabilised affordability are starting to be felt.

“In other words, consumers who have managed to keep their heads above water during the worst of the crisis should soon start taking advantage of the lower interest rates; the fact that new car inflation is starting to decline while used car inflation remains flat at zero percent; the slightly improved availability of bank credit; and the fact that consumers appear to have been paying down their existing debt and so their appetite for incurring new debt is returning slowly,” Von Höne said.

'Value gap' widens

TransUnion expects that this build-up of latent demand will initially be most evident in the used market with consumers opting for used rather than new vehicles based on both affordability and value considerations.

Von Höne said a “value gap” widened between new and used cars in the 18 months to mid 2009, as new vehicle prices rose and the value of used vehicles fell. This divergence appears to have made used vehicles relatively more desirable from a value-for-money perspective.

“In recent months, however, this gap has begun to close as the supply of good quality, low mileage, used vehicles has been tight. Nevertheless, we expect the value gap to remain for the foreseeable future, although the pendulum will swing back towards new eventually,” he added.

Within the used market, TransUnion expects highest demand - and a slight appreciation in prices - for cars in the R50 000 to R150 000 segment.

Future trends leading to 2010

However, the shortage of good quality, low-mileage, affordable used cars is likely to result in a further narrowing in the ratio between new and used sales. This ratio has been on a downward track since November, after hitting a high of 2.4 (one new to 2.4 used cars) in June. The ratio fell to 2.1 in November and further to 1.83 in February.

“Given the current price difference between new and used cars, the ratio of used to new sales would be higher if the supply of quality used cars improved,” he said.

While TransUnion anticipated that the supply of quality used cars would improve after the FIFA World Cup as a result of rental de-fleeting, the market could easily absorb these additional units.

Von Höne said while January and February's new car sales had been supported by rental purchases pre-World Cup - according to NAAMSA, rental purchases accounted for 15% of February's new passenger sales and 12% in January - the rental companies were unlikely to increase the size of their fleets dramatically for the soccer showpiece.

Latest media reports suggest that fewer international visitors were expected than had originally been anticipated.

With domestic business travel, which generally accounts for the bulk of the domestic rental market likely to be significantly curtailed during the World Cup, rental companies would largely have the capacity to cope with soccer tourists without significantly increasing the size of their fleets.

“There is no doubt that they will downsize their fleets after the World Cup, ameliorating the current stock shortage to some extent. The impact on used prices, however, is likely to be negligible,” he concluded.