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Rate hike will hit entry level vehicle market most

04 August 2006 Absa Group Communication

The interest rate hike will hit the lower income and entry level car buyer groups harder than any other and this will probably not change until the second half of 2007, says Marcel de Klerk, Managing Executive of Absa Vehicle and Asset Finance.

De Klerk says this is the very market which showed phenomenal growth previously however, if vehicles become less affordable, they feel the impact more significantly.

However, says De Klerk, rising vehicle prices will stimulate the used vehicle market which has experienced difficult trading the last 12-18 months.

After record vehicle sales in 2005 with total new vehicle sales surpassing the 600 000 level, sales continued to boom in the first seven months of 2006 with unit sales growing by 18,2 per cent to 366 809.

Ridle Markus, Economist at Absa, says that with factors like the higher interest rates the pace of new vehicle sales are unlikely to be sustained throughout the rest of 2006.

The rising interest rates, higher fuel prices, rising household debt levels, lower real income growth and a weakening housing market will all impact negatively on economic growth and vehicle sales.

But new vehicle sales could still surpass the 650 000 unit mark and sales in 2006 could increase by between 13-16 per cent compared with 2005.

During 2007 new vehicle sales growth is projected to dip to single digits, with growth of around 5 per cent a strong possibility, says Markus.

Although the impact of the interest rates hikes in the lower segment seems to be moderate, more expensive vehicles will cost their owners significantly more.

A vehicle costing R80 000 will cost R20 more at a rate of 11,0 per cent, R39 more at a rate of 11,5, R59 more at a rate of 12,0 per cent and R79 more at a rate of 12,5.

Compare this with the R74 more, R148 more, R222 more and R297 more a vehicle of R300 000 will cost at 11,0 per cent, 11,5 per cent, 12,0 per cent and 12,5 per cent respectively.

We expect the SARB to hike rates by at least a further 150 basis points over the remainder of the year, with a 50 basis points hike pencilled in for each of the three Monetary Policy Committee meetings to be held in August to December 2006, says Markus.

De Klerk says: We expect that some customers will not be able to afford to pay for their vehicles should interest rates go much higher however, our first option is not to repossess. We will make all efforts to accommodate customers and encourage customers who are in a precarious position to approach their bank.

Subject to a customers future affordability and on an individual basis, we can make several options available including increasing the payment term, bullet payments or a balloon payment to keep monthly payments low.

De Klerk says even if a customer experiences cash flow pressure the customer should not cancel the insurance on a vehicle. The customer may make a small saving now but in the event of an accident or stolen car, the customer will end up in a difficult debt situation.

Customers buying cars should be fully aware of whether they are entering into a residual or balloon payment agreement because this may have future delayed cash flow implications. Customers are encouraged to read and understand all terms and conditions before signing an agreement of purchase.

With the interest rate likely to increase further in the next two years, I would advise customers wanting to buy a car to ensure they have made provision for a further 2% increase in the prime rate, says De Klerk.

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