Demonetisation and price of used cars
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The government’s move to demonetise high-value currency is being tested on numerous parameters to determine its efficacy in dealing with unaccounted cash in the economy. In the meanwhile, car dealers are saying that sales of new and used cars have been hit hard by the cash crunch in the market.
According to a pre-owned car market report by IndianBlueBook, a vehicle pricing guide, the used car market in India is 1.2 times the new car market. New cars were at 2.8 million units for 2015-16. Moreover, only 12% of the used car market is in the organised sector.
According to CarDekho.com, an online portal for finding deals on new and used cars, 70% of new cars are bought with an auto loan. But less than 15% of the used car buyers end up financing their car due to issues in getting a loan for it. This means, currently a large number of cars are bought and sold in cash.
“Consumers have delayed their decision to buy a fresh car (either new or used) after the 8 November announcement. A car is a big-ticket item so the purchase can be postponed, as consumer focus is on securing daily essentials first,” said Vikram Chopra, founder and chief executive officer, Cars24.com.
Accordingly, there has been a decline in buyer interest since the demonetisation was announced. An analysis by CarDekho.com suggests that traffic on its online platforms has declined 27% since the demonetisation was announced. However, prospective domestic car buyers are showing signs of returning, said Shobhit Mathur, director-strategy, CarDekho.
Cars24, too, reported a decline of 30% in used car transactions across north, south and west regions of the country. “Interestingly, the south has recovered completely in just 2 weeks. We expect that in another two weeks the west will bounce back to normal. North has started recovering but we continue to see a 20% gap versus pre- 8 November. This sheds some light on customer behaviour by region. We expect the north to recover in 6-8 weeks,” Chopra said. Cars24 buys used cars directly from individual sellers and sells them to a network of dealers.
The recovery is encouraging, however, some stakeholders say that the sales may rise for a short time, as people may try to use their existing cash in older currency to make their bookings. “The very short-term effect is that those who were already planning to buy cars in the near future have immediately gone to dealers to book cars. This will sharply spike sales right away. But immediately after, we expect a contraction in demand and therefore sales will fall,” said Dhruv Chopra, chief marketing officer, Carwale, an online marketplace for cars.
Impact on prices and segments
The Federation of Automobile Dealers Associations has said retail sale of new cars after the demonetisation has been “near zero”. Buyer interest based on web-traffic suggests that the impact has been higher on used cars. While the traffic for new cars declined around 20% on CarDekho, it fell in excess of 30% for used cars. “The dip in the old-car search is significant and reflects the industry’s forecast that the segment, being the most cash-dependent, has felt the maximum impact of demonetisation and will feel further,” said Mathur.
Hatchbacks and sedans are the most affected segments. On 9 November, CarDekho’s page views of hatchbacks slumped to nearly half of what they were on 8 November. “This seemed a knee-jerk reaction to the sudden shortage of cash in an economy,” added Mathur.
According to Truebil, an online marketplace for used cars, there has been a drop of 10-15% in the price of used hatchbacks after demonetisation. The impact on prices of used sedans is in the range of 7-10%, while there is no significant impact on sports utility vehicles (see table).
Though demonetisation is the latest factor to impact prices of used car, other factors are also at play. Shubh Bansal, co-founder and chief of marketing and growth, Truebil said that November-December is a year-end period and many buyers feel that vehicles purchased during this period would become a year old in the new year. “Second reason of sales and price drop is the lack of liquidity caused by demonetisation,” added Bansal.
Should you buy?
There were reports that some people had bought used cars with their old currency notes. Price of used cars went down despite such rumours. “The baseline for used car prices has moved down. Contrary to rumours (of purchases with banned notes), prices for used cars fell by 20-25% across markets,” said Chopra of Cars24. Therefore, he feels, this is a good time to buy a used car. “Used car prices have fallen and hence used car sales will go up strongly soon,” he said.
New options for buying used cars are coming up. For instance, CarDekho.com has provided a dedicated platform for dealers, who can check for loan offers on any pre-inspected car by a used car buyer and check their eligibility for the loan with multiple banks .
There are breaks for new car buyers too. Car makers are announcing tie-ups with banks for financing 100% of the on road price, which is generally not preferred by the banks.
The problem with used-car financing is that lenders need to assess the quality of the car, the creditworthiness of a buyer and also manage the title transfer process. This makes the entire used-car loan process cumbersome for both customers and the dealers. Hence, dealers often discourage their customers from going for loans. However, the current shortage of currency notes in the market will compel more used car dealers to opt for modes of non-cash payments. And, this could also mean that these dealers find value in encouraging their customers to finance their old car purchases.