/ 12 January 2011

Vehicle sales up, prices should remain stable

Is the end of the recession in sight? If vehicle sales are anything to go by, the answer is yes.

The National Association of Automobile Manufacturers of South Africa (Naamsa) has just released figures showing that new vehicles sales were 24,7% higher than last year and sales recorded in December 2010 were 29,6% higher than those recorded in December 2009.

According to Sydney Soundy, managing executive of Absa Vehicle and Asset Finance, this trend indicates that positive growth is likely in 2011. “It seems we’re at the tail-end of the recession. Car prices remained fairly stable throughout 2010, and interest rates reduced leading to improved consumer disposal income which led to improvement in vehicle sales,” he said. “We expect inflation to be held in check this year, too.”

Affordable vehicles are tops
Soundy has cautioned that although Absa approved more vehicle finance in 2010 than in 2009 (38% more vehicles were financed), South Africans still remain highly indebted as the debt-to-income ratio of households has remained above 78%. So although interest rates are at their lowest levels since 1974, financial conditions for the consumer remain challenging.

“As tempting as it may be to seek finance for the maximum affordable repayment installments in order to get the car of their dreams, consumers are still advised to go for affordable repayments with sufficient head-space in case interest rates go up,” Soundy said.

Alternatively, you can fix interest rates. “Given that we are most likely in the lowest interest rate cycle, this is the best time to consider fixing you rates ahead of any potential rate increases,” Soundy said.

He pointed out that Absa has noticed an increasing trend in the number of customers applying for a 72-month contract. He says that although buyers can soften their installments by lengthening their contracts, this is not the most advisable way to go as consumers remain indebted for a longer period.

“We look at each case on its merits,” Soundy said. “If the buyer can afford it and there’s sufficient cover, it’s not a problem. It may be risky if customers want to purchase specific vehicles and won’t be able to afford to pay them off in 60 months or less. But we look at the customer’s balance sheet and make a decision based on affordability.”

Absa has also seen fewer vehicle repossessions. “The average went down in 2010, from 2009,” Soundy said.

Vehicle finance up
The narrow gap between new and used vehicle prices meant that the ratio of used to new vehicles changed. “Previously, two used cars were financed for every new car. In November, the ratio was 1,7 used to one new. This dropped to 1,5 used to one new in December because of the buoyant sales in new cars for the month,” said Soundy.

The average amount financed by Absa to the personal market was R177 000 in December (up from R175 000 in November). This figure is an average of combined values of both used and new vehicles.

Most buyers are still opting for small- to medium-size, entry-level vehicles. This shows consumers are cost-conscious.

“As the economy improves, more people will qualify for vehicle finance, but we don’t want to see unmanageable debt,” said Soundy.

“Write-offs gobble up the bottom line, so we’re still acutely sensitive to appropriate risk.”

It would seem, then, that buyers are showing good sense when it comes to vehicle purchases. And buyers should perhaps heed the advice to opt for fixed rate finance, to hedge against future rate increases. According to Naamsa, the strength of the rand should keep prices fairly stable.

Naamsa’s website shows that Toyota came out tops in its new vehicle sales statistics for December, with 9 711 vehicles sold. Next came VW, with 5 227, followed by GMSA (5 155), FMC (4 223), Nissan (2 304), BMW (1 938) and Mercedes-Benz (1 912). The top 10 was rounded out by Renault (963), Honda (701) and Chrysler SA (418).

Read more news, blogs, tips and Q&As in our Smart Money section. Post questions on the site for independent and researched information