Slower growth for used car market

After a relatively prosperous 2010, the used car market in 2011 is likely to experience slower growth of around 10 to 12 percent.

"The relative shift in demand from new to used cars experienced over past 12 to 18 months is likely to run out of steam and be reversed into 2011," Mike von Höne, CEO of vehicle risk intelligence company TransUnion said in a statement on Friday.

The returning shift in relative demand for new over used cars was being driven by several factors, one of which was the closing of the value gap between new and used vehicles.

"New car prices have largely stabilised, while used prices have been increasing on the back of higher demand and a shortage of quality, low-mileage units."

In addition, many people had held on to their vehicles for five or more years. These vehicles now needed to be replaced at an increasing rate.

"This replacement cycle buying is also contributing to the pendulum starting to swing back in favour of new vehicles -- albeit slowly."

TransUnion expected to see most purchasing activity at the lower end of market as people remained cost and value conscious.

"Whilst expecting further growth in both new and used markets in 2011, the rate of growth in activity was likely to be more muted when compared to 2010 growth rates."

Current expectations were for the new car market to grow more slowly, at 12 to 15 percent in 2011, off a revised base of around 460,000 units in 2010 -- a level last seen in 2005.

"Sustainability of the current 25 percent growth rate in the new car market is simply not possible," von Höne said, as new vehicle purchases in 2010 had been boosted by corporate buying.

He expected similarly moderate increases in new car sales to fleet and rental business next year.

Von Höne said the 2010 benefit, resulting from the rental business stocking up before the Fifa World Cup, was unlikely to be repeated.

Consumer spending was likely to remain conservative in 2011 on the back of still high, albeit reducing, debt levels; the sluggish economic outlook particularly in relation to employment creation; and reduced borrowing capacity, which was being exacerbated by continued conservative bank lending policies.

"Dealers are indicating that whilst finance approval rates are currently in the mid 30 percent range, off the lows of around 15 percent, they are still off the peak of around 50 percent approval."

Von Höne said that in addition, financing of used cars would also likely continue to be impacted by banks' heightened focus on risk. This would mean increased scrutiny of both "value" (to ensure equity in the deal) and "pedigree" (to ensure vehicle was not stolen, cloned, dual financed or otherwise "hot").

A significant further price increase for new cars in 2010 was not expected, given the ongoing strength of the rand.

"Indeed, TransUnion is anticipating manufacturers and banks could possibly start offering attractive finance deals to entice consumer demand," Von Höne said.

While the increasing value gap had undoubtedly been the dominant story over the past 12 to 18 months, some softness in used vehicle prices had been noticed in the past two to three months.

"In the coming months, we expect used car prices to drift sideways or continue to soften slightly."