This new car buying trend in South Africa could spell big trouble

The country reeled in the face of rising fuel prices and interest rates during July, but seemingly without effect on new vehicle sales, according to Lebogang Gaoaketse, head of marketing and communications at WesBank.

“It would be easy to get over-excited about July sales when looking just at the numbers,” said Gaoaketse. “However, the context of July last year is critical to appreciating the slow and steady growth being experienced in the market.”

But growing, it is, which remains reassuring.

According to the automotive business council Naamsa, new vehicle sales grew 30.9% to 43,593 year-on-year, the fourth consecutive month of sales growth since the market’s slow April performance.

In a similar vein, July 2021 sales were the lowest recorded last year due to heightened Covid-19 restrictions to Level 4 and the KZN unrest that also interrupted logistics. As a result, year-on-year comparisons are skewed, although July sales still grew 6.3% month-on-month to record the third-best sales month this year.

“The significant increase in interest rates during the month may dampen August sales as new deals confront an affordability challenge or consumers simply delay purchase decisions,” said Gaoaketse. “Nevertheless, interest rates remain relatively low, continuing to make a new vehicle purchase an appealing financial opportunity currently.”

WesBank said it expects further interest rate hikes for the remainder of the year, providing an opportunity for the market to conclude deals before these expected increases and capitalise on savings to be made in the early part of the contract.

Passenger car sales jumped 50.2% during July to 31,455 units. Relatively, this represented a 6.5% growth month-on-month, which was still ahead of the whole market growth. The segment was buoyed by 4,150 rental sales units.

Light Commercial Vehicle sales declined 6.9% year-on-year but actually showed a 7.6% growth compared to June sales. This segment sold 9,547 units during July.

“Affordability remains a key driver in the vehicle purchase journey,” said Gaoaketse. “WesBank’s average deal size on new sales financed by the bank were lower during July than a year ago, despite price increases. Deals financed with a balloon payment have also increased substantially, indicating a need to lower the monthly instalment to suit household budgets.”

A balloon payment allows a buyer to take an amount owing on the purchase price of a car and set it aside, meaning the monthly instalment amounts are calculated on a lower value – in turn making repayments more affordable.

Wesbank has previously warned that a looming lump sum payment, after years of driving a vehicle, is easy to ignore and forget. But settling that debt ultimately remains the responsibility of the buyer. That said, a balloon payment has some advantages if used wisely.

“It is intended to assist with cash flow management, but it requires discipline to save. Customers should be honest with themselves with regards to their personal financial management when deciding on whether a balloon payment is suited to them or not.”

Year-to-date sales continued to show growth off a similar context to July’s sales. The first seven months of the year have delivered a 13.9% growth in sales to 297,133 units, making it possible for the new vehicle market to exceed 500,000 sales in 2022.

In addition, the consumer price inflation exceeded the top end of the South African Reserve Bank’s (SARB’s) target range of 3% to 6% to reach 7.4% in June 2022, the highest level since May 2009, as prices continued to accelerate, mostly for transport, noted Naamsa.

Consequently, the SA Reserve Bank increased interest rates by 75 basis points in July 2022, the biggest hike since September 2002 and the fifth increase since November 2021. “Further interest rate increases are expected for the balance of the year that would impact consumer and business sentiment negatively, and consequently the new vehicle market,” the association said.

On a year-to-date basis, vehicle exports moved into positive territory for the first time this year and were 2.9% ahead of the corresponding period 2021. Although further new locally manufactured model introductions are expected to boost vehicle exports for the balance of the year, global economic growth prospects have been revised downwards.

“A key driver in this decline is the much weaker growth prospects for Europe, which is the South African automotive industry’s largest export region,” it said.

Read: Car owners in South Africa facing a perfect storm

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This new car buying trend in South Africa could spell big trouble