Soaring financing costs and prices have slammed brakes on South Africa’s new car sector

8 Jul 2024

A crushing combination of rising costs and inflation is squeezing demand for new cars as consumers react to their shrinking wallets.

Buying a new car in 2024 will cost you almost 5% more than it did this time last year. This is choking the appetite for new vehicles while feeding the demand for used cars.

The prolonged sales slump in the new car sector, reported by the Automotive Business Council of South Africa, Naamsa, reflects both the state of the economy as well as the growing wariness of taking on more debt.

Finance house WesBank reports that the price of new cars has jumped by 4.7% compared with last year. This, coupled with high interest rates, is squeezing household budgets, causing consumers to either hold onto older cars or extend loan terms to manage repayments.

Stretching it

TransUnion’s Vehicle Pricing Index for Q1 2024 shows that loans are getting bigger. The average loan value for financed vehicles rose to R391,000, up from R387,000 in Q1 2023. However, the increase is below the consumer price index and the inflation rate for both new and used vehicle prices. This shows that while nominal loan amounts have grown, they’re not keeping up with the rising costs of cars and reflect both diminishing disposable income and spending power among consumers.

Lebo Gaoaketse, head of marketing and communication at WesBank, says the vehicle financing house’s data shows that the average loan amount on a new vehicle increased by 3.5% in June; the average deal duration has increased by 3.8% to over 51 months, and the average contract period is now also over 73 months compared with a year ago.

In June 2024, the average loan at WesBank for a car was R410,000. With the current prime lending rate of 11.75%, the monthly repayment would be around R8,054.83. Financing the same car in 2020, when the prime rate was just 7%, the monthly payment would have been R1,015.81 less.

Over the financing term of 72 months, Gaoaketse says it makes a huge difference of R75,730.32 more paid, simply due to higher interest rates.

Naamsa’s latest data shows new car sales have plunged 14% year-on-year to 40,072 vehicles. While there was a small uptick (8%) in June compared with May, the outlook remains gloomy.

The first half of 2024 reflects this slump, with sales down 7.4% year-to-date at 246,052 units. This steep decline casts doubt on the industry reaching its usual target of 500,000 units sold in a year. Both passenger cars and light commercial vehicles are feeling the pinch. Passenger car sales dipped by 9%, while light commercial vehicles took a harder hit with a 24.3% decline.

With living costs rising across the board, many South Africans are simply being priced out of the new car market. They’re buying down, or buying second-hand, and even looking for alternatives like ride-sharing, or delaying purchases altogether.

The shrinking numbers of those who can afford to buy new cars also suggest that unless inflation is brought down, the market for new vehicles will continue to be depressed.

Brandon Cohen, the chairperson of the National Automobile Dealers’ Association (Nada), says with interest rates at a multiyear high (and for an extended period), as well as consumers being under financial strain, the prospect of purchasing a new car is beyond the reach of many.

“Consumers need mobility to be economically active (due to the need for personal transport in many jobs and the lack of a strong and efficient public transport system) so the used car market has seen stronger demand over the past few months.”

With work-from-home arrangements, alternatives to car ownership and the cost-of-living crisis, a growing number of households are also ditching their second cars.

Data from MAPS, a nationally representative survey of 20,000 people conducted by the Marketing Research Foundation, suggests that the number of people who say they have two cars in their households has gone down by nearly 7% from 2022 to 2024. The MAPS survey shows only about 30% of households in South Africa have access to a reliable vehicle, which is supported by data from Stats SA’s General Household Survey.

However, Cohen says the need for a second vehicle has “slightly diminished”, although even in a depressed market, Nada had not noticed significant numbers of second cars being sold off.

Surging costs

The average household income for car owners is R33,000 a month, but for those who bought a recent model (built in the past two years), household incomes average at around R47,000.

For those who qualify for vehicle asset financing, the cost of borrowing has surged over the past three years, says Andrew Fulton, director at Eighty20, who notes that there have been 10 consecutive interest rate hikes since mid-2021, which have raised the prime lending rate from 7% to 11.75% in 18 months.

South Africa’s new car sales slump isn’t just an industry statistic; it’s hitting consumers directly in the wallet, he says.

Citing the example of the Toyota Hilux — our most popular bakkie — Fulton says a new 2.8 GD-6 RB Legend X-Cab Toyota Hilux (priced at R574,900), with a 72-month lease, would have cost around R10,500 less in 2021 but by early 2023, they were paying almost R1,200 more in monthly repayments.

That Hilux currently retails for R701,800, which is about 22% or R126,900 more than it cost in 2021, which requires an instalment of R14,000 per month.

“This trend has significantly affected the middle class, who hold around 30% of all VAF (vehicle asset finance) loans. Over the past two years, their loan balances have steadily decreased, with a notable decline of 100,000 individuals holding VAF loans in this segment.

“Due to inflation and economic conditions, South African car owners are either holding on to their vehicles for longer or opting for cheaper used cars,” he says in a media release.

Age before beauty

Lightstone data further reveals that more than 42% of vehicles on South Africa’s roads are between 11 and 20 years old. The average age of passenger vehicles has also climbed significantly, reaching 10.5 years in 2022. This is a sharp rise from the 9.33-year average seen just a decade ago (2014-2015).

costs car sales graph

A TopAuto report from February 2024 found that 73% of new cars are now exceeding R500,000, which requires instalment repayments of about R10,000. This makes affordability a major hurdle for South Africans looking to buy a new vehicle.

Out of an estimated 1,481 unique models (excluding trucks and buses), 1,082 fall into this category, which is a dramatic shift in the new car market.

This is one reason why the number of people with VAF in South Africa — 1.9 million — has not increased since 2019, says Fulton. DM

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Age before beauty