The current formula for vehicle valuations in South Africa is outdated and doesn’t reflect the true market value of used cars.
The single, centralised reference point for car valuations was built in a vastly different automotive landscape than what we see today.
Kriben Reddy, founder and CEO of Kredo Mobility, explains that the first valuations book known as the Mead & McGrouther Auto Dealers’ Guide was published in 1960.
It relied on a manual process where representatives physically visited dealerships, recorded stock, purchase prices, and sale prices, and compiled the data into a monthly guide.
While many of these processes have been digitised over the years, the same basic principle applies when the value of a car is determined today.
“However, the automotive market has evolved significantly over the past two decades,” said Reddy.
“Today, used-vehicle sales outpace new-vehicle sales, consumers have access to more data points, and economic and supply chain disruptions can cause drastic swings in vehicle values almost overnight.”
The single-source valuation model that worked in a slower, more predictable market is thus no longer keeping up.
He said the problem with a lagging model is that it takes historical data and tries to project it forward, often missing real-time market shifts.
“This was evident during the Covid-19 pandemic, when used vehicle prices surged due to global semiconductor shortages limiting the supply of new vehicles,” said Reddy.
During this time, the guide continued to show depreciation, but in reality, used cars were appreciating in value.
“This left consumers underinsured, as banks and insurers continued using outdated references while replacement values soared by as much as 40%,” said Reddy.
Consumers lack choice
One of the main issues within the industry is that the vehicle valuation market is currently controlled by two major suppliers, with one holding the dominant market share.
This creates an environment where a single valuation source dictates the entire industry, leaving consumers, dealers, and insurers with no choice but to use those values.
“The effort and cost required for financial institutions to switch out the coding data already embedded into their systems is significant, which means the industry remains locked into a single reference point, despite its limitations,” said Reddy.
Another key issue is that this valuation model is based on a national average, failing to account for variations driven by vehicle demand, pricing, and desirability by province or city.
“Factors such as colour, model popularity, and local market trends influence actual sale prices, but these nuances are not reflected in a valuation system that relies on broad national data,” said Reddy.
The existing vehicle valuation model also follows a bottom-up approach that starts with historical data rather than real-time market pricing, which Reddy notes is a flawed system.
A more accurate method would be a top-down approach: beginning with what the vehicle is currently selling for in the market and then working backward to determine trade and finance values.
Dealerships, for example, can then look at what they can sell a car for first. If they know a car will fetch R100,000 in the current market, that should determine its trade-in value.
“In an era where consumer experience and personalisation are priorities, the existing vehicle valuation model offers little choice, leaving consumers with little to no say in the valuation of their vehicles,” said Reddy.
He emphasises that car buyers, dealers, and financial institutions should have access to multiple sources of data, rather than being locked into a single reference point.
“The industry needs real-time, data-driven valuation methods that consider multiple factors, including regional demand, individual vehicle specifics (such as vehicle identification number data), and actual sale prices,” concluded Reddy.
“A system that reflects how modern buyers and sellers interact with the market is long overdue.”
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