South African car buyers should brace themselves for tougher times

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New car buyers should brace themselves for even tougher times

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As 2014 comes to an end, it is becoming increasingly obvious that good times are also drawing to an end for car buyers - an inevitable result of the unstable value of the rand against international currencies, rising interest rates and general cost pressures on household income.

We all know that economies move in cycles, and although the news about increasing vehicle prices will prove to be a concern for many enthusiasts, it is fortunate that the country has managed to avoid officially falling into recession, something that would have placed even further pressure on an industry which has long been a leading indicator of economic activity in South Africa.

However, there is a silver lining in the dark clouds looming over motorists who are prepared to plan ahead.

Bargains will still exist in the new car market.

Manufacturers will be looking towards the introduction of new models in 2015. To the canny, those who worry less about cosmetic changes to vehicles than others; this will represent an opportunity to get a brand new car as dealers reduce prices on their present stock holdings to clear the floors for 2015 models.

Furthermore, those who still aspire to drive their dream cars, while not spending a fortune, should consider buying down, looking out for demo models coming into the market, or capitalising on attractive deals from manufacturers and dealers.

As prices increase, debates between potential buyers will become fiercer. Traditional buying options will be examined and the benefits of staying in the market will be scrutinised. Basically, many people looking to purchase a new vehicle will point out that it is cheaper to stay in the market by trading in vehicles when their values are still reasonable (usually around the 24-month mark). This will enable the cost of buying a new vehicle to somewhat decrease, even though monthly instalments may increase.

This option is infinitely less costly on a monthly basis than holding on to a vehicle long past its ‘sell by date’. Buying a new vehicle will then be a massive investment. However, if this is planned for and you have saved up for the deposit, the picture can change once again.

Whatever the merits of the various debates, the reality for car lovers, however, is that car prices will increase and sales will drop in 2015. To what levels though is anyone’s guess? Moreover, in reaction to predicted interest rate increases by the Reserve Bank, we have seen car prices being increased at a much slower pace than many had expected.

The commercial vehicles sector has experienced similar downward pressures to date. During 2014, sales under all categories came under pressure. The result has been a delay in replacement cycles as fleet owners try to reduce costs by lengthening the lifespan of their vehicles - the negative side to this has been an escalation in maintenance costs, while owners compete fiercely in a market where profit margins are shrinking.

At first glance, the NAAMSA figures released at the end of October 2014 seem to indicate that sales are back to record levels. Rather than contradicting the view that good times for car buyers have reached the end, they have to be seen in context. Total vehicle sales for October reflected an improvement of 4.7% (an additional 2 654 vehicles higher than October 2013). Exports too, showed a massive improvement rising to a record 32 165 units. This is 33% higher than October 2013.

The tale of the tape shows that these sales were boosted by sales to the vehicle rental industry (14.3%), government accounted for an additional 4.3% of volumes and corporate fleet sales absorbed another 4.2% of the total. The massive year-on-year improvement of export sales is most welcome, but is being compared to 2013, when volumes were impacted on negatively by the protracted industrial action that was a feature of 2013.

Add pre-emptive buying to beat the announced major price increases that commentators say will be the norm in 2015, and the overall picture is complete.
However, it can be expected that with new offerings such as the Mercedes Benz C-Class being assembled for export, and an improvement in global economies, exports could become an industry lifeline in 2015 and beyond. The irony of course, is that as the rand declines, making our vehicles more expensive, it provides a boost for exports.
There is no doubt that one of the major determinants of sales locally will be affordability. Household credit growth sank to its lowest level since November 2012 when it stood at a high of 10.4%. By April 2014, this had dropped to 4.6%.

Trends, drawn from Standard Bank’s Vehicle and Asset Finance sales records at the end of October 2014 show that the number of applications with residual values increased by 12.4% month-on-month. On the other hand, applications with deposits increased by only 3.4%. Average contract terms are also on the rise growing year-on-year for the period by 3.0% - a move from 67 months to 69 months. This data indicates that pressures on personal budgets are continuing unabated and will continue to do so into 2015.

Also to be considered is the National Credit Act (NCA), which strongly influences car sales, as its requirements impact on about 70% of all cars sold in South Africa as they are purchased through instalment credit financial plans.

Price increases will also significantly affect people running personal and commercial vehicles due to increasing maintenance costs. As a general rule, the costs of running a vehicle should not exceed 30% of an owner’s gross monthly income.

Inflationary cost pressures, the higher costs of imported parts and the value of the rand have sent these costs soaring. Today, monthly running costs, which include the costs of fuel, often approach the level of the monthly instalment paid on the vehicle.

This trend will continue into 2015, with industry leaders predicting that car prices and parts will rise at rates higher than prevailing inflation rates for at least the next two years.

The fuel price, which fluctuates several times each year, is a primary cause of operational increases. Additional costs such as increases in licencing fees, toll road costs and increases in tyre prices and insurance premiums also add the cost burden.

It is unfortunate that many motorists, in a bid to curb operating costs, will elect to reduce their insurance premiums by opting for much higher excess payments in the event of an accident. While this may seem like a reasonable move, it could prove costly in the long-term. Nothing could be worse than having a damaged car and then having to face an enormous excess bill that puts additional stress on household income.

Keeping car and maintenance payments in check can be achieved by considering a few options:

The uncertainty of buying a car in times when interest rates are on the rise can be reduced by opting for a fixed rate financing option. The rate payable will be slightly higher, but the plus side of pegging vehicle costs to a set monthly amount provides some certainty and peace of mind.

Considering to lease a car instead of buying it could be a better option for some motorists. With a full maintenance lease, a set monthly fee is charged for a vehicle, with servicing, maintenance, licencing, insurance and even tyre replacement falling on the owner of the vehicle rather than the lease holder.

In Europe, in contrast to South Africa, many people regard cars as depreciating commodities, rather than assets, and opt for the leasing option to contain costs.

So, although the motoring scene in 2015 will considerably change from that of the ‘golden years’ that preceded it, people will continue to buy new cars. What will remain unchanged in 2015 will be South Africa’s love of cars and everything involved with them.

Nicholas Nkosi, Head of Vehicle and Asset Finance – Personal Markets at Standard Bank.

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