Cars are not cheap – a vehicle tends to be the second biggest purchase that you’ll make in your lifetime, but are they too expensive in South Africa compared with the rest of the world?

When the world’s automotive market peaked in 2017, at 86 millionunits, any mention of vehicle “downsizing”referenced retirees. You know, the kind of people who can afford upmarket vehicles, but who lackthe confidence to navigate a large luxury sedan or SUV in traffic– or into a narrow parking-garage entrance, which is why they buy smaller, more affordable cars (usually with high seating positions).

But downsizing has become the default car buying option for most buyers. In the court of public opinion, there is a broad consensus that cars have become exorbitantlyexpensive. It was a telling moment when double-cab bakkies crested the R1-million price ceiling.

Without drowning in the boring economic theory or anxiety of it all, global product prices are rising after years of low price inflation. And automotive prices are rising too, due to the chip shortage and scarcity of finished products (ie stock for dealers).

The affordability of any new car isn’t merely a question of the purchase price. Value depends greatly on purchasing power. If South African salaries/incomes are increasinggenerously,while general inflation is kept under control, surgingnew car pricing won’t be an issue. But that’s NOTwhat is happening…

Suzuki built its local business on a legacy brand name, with very low priced products. But are they really low enough?

Using strong historical data

There is no benchmark quite like the North American automotive market. For decades, in the world’s largest new-vehicle market, US product planners and actuaries have been crunching numbers to help us understand the relationship between income and affordability. And they don’t make for happy reading.

On ahistorical trendline, Americans have been able to buy an average new car with 24 weeks of salary – effectively half a year’s income. To qualify, that’s an average American income with which to buy an average car in the American market. To work out the price of the latter, take the total value of cars sold over a period and then divide it by the number of cars sold during the same period (like a year).

How does the 24-week income principle apply to South Africa?

Harvesting data from the BankservAfrica Take-home Pay Index (BTPI) for 2021, provides us with a real South African monthly salary average of R15 542. That calculates to R3 885.55 a week. Multiply it by 24 weeks and we get R93 252. And you can project the issue before we even raise it – there’s no new car close to R93252. Or is there?

You’d expect a strong Chinese value offering below the theoreticalaffordability threshold.

Polo and Hilux are the best sellers –but way beyond the reach of most

South Africa has a troubling income disparityand, if we narrow the data set to what banks and SARS consider middle class, the numbers do improve. Remarkably. South African middle-class earners are quite broadly defined, with a monthly income between R22000 and R40000.

Therefore, if we take the “middle of middle-income”, it calculates to R31000 and, using the 24-week income formula, we get to R186000. That’s noteven close to South Africa’s best selling passenger car (Volkswagen Polo Vivo) or our most popular vehicle, the ToyotaHilux.

So how does R186000 worth of purchasing power translate into new car options? Not spectacularly. Your choices are limited to Indian or Chinese build budget vehiclesfrom BAIC, Mahindra and Suzuki.

Extract the average new-car financing price, and South African middle-class buyers’24 weeksof salary get them nowhere. Wesbank is the most authoritative financial institution regarding new vehicle financing. Its numbers for Q1 2022 see average car financing at R371 454. That number is twice the purchasing power of South African middle-class buyers using the 24-week income formula.

The ambitious American model says car purchasing should be half your salary for a year. Feeling wealthy?

Car buying power – is very much in a budget segment

The datasets are upsetting. Going purely by the new-car numbers and middle-class salaries, South Africa’s car market does indeed appearto be overpriced by nearly 100%. But at least the country has a significant and healthily traded pre-owned market. Where genuine value for money can be found,right? Well…

With a global shortage of new vehicles, some of the most robust vehicle price inflation has affectedpre-owned cars. Even with mileages increasing, owners can now trade or sell their existing cars for record valuations. If you are in the market, this dynamics works to your advantage. New entrants without a current vehicle to trade and reduce the inflationary pressure are experiencing a nasty car-buying shock.

We pulled some data from the Cars.co.za database and the average value of cars listed is R359023. That’s only 3.4% less than the average new car price – a powerful indication of how strong demand is across all market segments.

On absolute (and middle-class) metrics, car prices are way beyond the American benchmark equation of 24 weeks’ salary, for new-car purchasing parity.

F-Series remains the world’s best-selling vehicle. Even in average spec, it is “unaffordable”.

Lots of bad news, then. But is there must be good news, on the horizon? Not really. The chip crisis and continued global supply chain disruptions won’t help to ease components shortages or input costs for new-car production.And unless South African salaries benefit from dramatic increases soon, the disparity between incomes and new-vehicle affordability will widen.

So, is the situation better across the waters? No, South Africa’sreality is not an isolated one. New-vehicle prices are equally unaffordable in America, where the historical 24-weeks-salary-to-buy-new data has been shaped and tested over decades.

Half a year’s income in America works out to $32000. And the average new car price in the United States? That will be $47000, which works out to a 32% shortfall in affordability between American income levels, and new car prices, on a historical affordability index.

Are new vehicles too expensive? It would appear to be the case, measured against average income levels. And neither prices nor salaries will move in opposite directions soon – to redress the imbalance.

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