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Car dealers who have been through a torrid time in the past 18 months can expect things to improve with the used car market leading the way.

Mike von Hone, CEO of vehicle risk intelligence company TransUnion Auto Information Solutions, said in a statement on Friday that expected improved sales volumes in the coming months would enable the battered dealer market to restore profitable growth.

Von Hone said that indications of a turnaround in the car market was supported by increasing volumes of vehicle finance registrations data for both new and used vehicles.

This was underscored by the fact that the National Association of Automobile Manufacturers of SA (NAAMSA) statistics for new car sales for the first two months of 2010 were 18 percent ahead of the corresponding two months in 2009.

Number of registrations growing

"Together, new and used vehicle finance registrations were up by 29 percent year-on-year in January, and 10 percent year-on-year in February."

He said used vehicle financing registrations alone were up 18 percent and 15 percent in the first two months of 2010 respectively.

"TransUnion's expectation is that this trend will continue based on the fact that that although consumers are remaining cautious, the benefits of stabilised affordability are starting to be felt," Von Hone added.

He said consumers who had managed to keep their heads above water during the worst of the crisis should soon start taking advantage of the lower interest rates and the fact that new car inflation was starting to decline while used car inflation remained flat at zero percent.

Other factors

Other factors that would lead consumers to purchase vehicles included the slightly improved availability of bank credit and the fact that they appeared to have been paying down their existing debt.

TransUnion expected that this build up of latent demand would initially be most evident in the used market with consumers opting for used rather than new vehicles based on both affordability and value considerations.

Von Hone said a "value gap" widened between new and used cars in the 18 months to mid-year 2009, as new vehicle prices rose and the value of used vehicles fell.

"This divergence appears to have made used vehicles relatively more desirable from a value-for-money perspective."

Supply gap closing

He added that in recent months, however, this gap had begun to close as the supply of good quality, low mileage, used vehicles had been tight.

"Nevertheless, we expect the value gap to remain for the foreseeable future, although the pendulum will swing back towards new eventually," he said.

Within the used market, TransUnion expected highest demand - and a slight appreciation in prices - for cars in the R50 000 to R150 000 segment.

"However, the shortage of good quality, low-mileage, affordable used cars is likely to result in a further narrowing in the ratio between new and used sales."

Downward trend

The ratio had been on a downward track since November, after hitting a high of 2.4 (one new to 2.4 used cars) in June. The ratio fell to 2.1 in November and further to 1.83 in February.

"Given the current price difference between new and used cars, the ratio of used to new sales would be higher if the supply of quality used cars improved," he said.

While TransUnion anticipated that the supply of quality used cars would improve after the Fifa World Cup as a result of rental de-fleeting, the market could easily absorb these additional units.

Fleet factors

Von Hone said that while January and February's new car sales had been supported by rental purchases pre-World Cup, the rental companies were unlikely to increase the size of their fleets dramatically for the soccer showpiece.

"Latest media reports suggest that fewer international visitors were expected than had originally been anticipated," he added.

With domestic business travel, which generally accounts for the bulk of the domestic rental market likely to be significantly curtailed during the World Cup, rental companies would largely have the capacity to cope with soccer tourists without significantly increasing the size of their fleets.

"There is no doubt that they will downsize their fleets after the World Cup, ameliorating the current stock shortage to some extent. The impact on used prices, however, is likely to be negligible," Von Hone said.