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Forg's Dark Corner

27th November 2001

By Matt Cremer

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If you're motoring around in a newish car, or are planning on buying a new or relatively new car, then what's the situation with your budget? That is, how much have you decided you're happy to pay for fuel, maintenance etc? Have you decided to not get the Falcon, and buy the Accent instead, because the Accent uses so much less fuel?

What if I told you that fuel costs were going to be nothing compared to depreciation? Would that change your mind on how much more a big six-cylinder car costs compared to a small four? OK, it's not going to be true in absolutely all cases, but then if you do the mileage required to eat through that much fuel then you're probably devaluing your car at an accelerated rate too ...

I suppose it's worth explaining a few things, with all this talk about depreciation. For example, what do we mean when we say one car depreciates harder than another? In some ways a Mercedes Benz (with a great reputation for resale value) will hold its value much better than the cheapest Hyundai you can buy; in other ways the Hyundai far outstrips the Mercedes for resale value ... it all depends on how you look at it, how much you're spending, and even what you want for your dollar.

Click for larger image

Most people who're talking about depreciation will usually be thinking in terms of the retained value of the car as a percentage of the original sale price. So they'll say that Car X is worth 75% of its new price when it's a year old, 66% when it's two years old, and 62% when it's three years old. So if it's a $100,000 car, it's worth $75k when it's one year old, $66k when it's two years old, and $62k when it's three years old.

But even then, there can be some confusion. You have to read the fine print - for example, do the above calculations include on-road costs? Well, they usually don't, but then some finance companies might. You also have to know if those resale values are retail (in a used-car dealer), wholesale (eg trade-in), or private sale ... if you're on a lease, you'll quite likely be trading your car in, and that can obviously make a big difference to what you get back.

By now you may be wondering how these figures are calculated? Where do predicted resale figures come from?

Well, it really depends on the source. Companies like Red Book ( specialise in all sorts of motor-vehicle information, so they'll be trying a scientific approach. They'll be using a method that looks at previous series of a given model, gets the resale figures on those previous models, and applies that to the new model as a resale prediction. This can be a little tricky, because you need lots of data on the value of vehicles; most new models are released in the middle of a year, and there are also price rises during the year, so you have to be sure to compare the used value of a Celica to the correct value for that model of Celica when it was new.

Some finance companies once used a much simplified approach compared to the one outlined above. They might have a few categories of vehicles, and arrange leases on cars according to those categories. However, to stay competitive, most of them list vehicle-specific values these days, as far as I'm aware.

Different trim levels will depreciate differently, as well. Except in odd cases, the base level of many models tends to hold its value the best, with the upper-spec models tending to depreciate towards the lower models. This makes sense when you think about it; as cars get older, people tend to think more about reliability than trip computers. Of course, there are always exceptions for the exceptional; the Impreza WRX did, in the late 90's, tend to have a higher resale value than the base model Imprezas (at least, as a percentage of its new price).

Similarly, most options are worth diddly-squat on a used car, so you can't add them into any calculations on possible future values. However, they still cost money to buy ... so you're virtually throwing away the money you're paying for those options. You can often sell a used stereo for more in the local classifieds than the value it'll add to your car (assuming you've got something with which to fill the hole in the dash) - and as a trade-in to a dealer, you'll get pretty-much nothing extra for having an aftermarket stereo.

There are a few options that hold a value. Air-conditioning is one, and certain engine and transmission options will too (eg Holden-badged Commodores with HSV-fitted engines used to depreciate at a reasonable rate in the mid 90's). But few enough people add value to sunroofs, headlight covers, floor mats, metallic paint etc to allow them to add any real value to a used car. And some aftermarket things can even reduce resale; the demand for particularly ugly Vileside-style body-kits on Toyota Corollas is probably pretty low, meaning you'd have a hard time shifting a car with such a kit.

Now, it's this "as a percentage of its new price" thing that does unstick a few people. You see, a car can have the world's highest percentage resale, and still cost a helluva lot more than a cheaper car.

I've included an example in an attempt to show what I'm talking about - it involves a list of used values for two fictitious cars, along with the price they were when new. They're actually fairly realistic values for certain cars in those price-ranges; there are vehicles that do better, and there're ones that do worse.

As you can see by referring to the table, our more expensive Car A starts at $100,000, whereas our Car B is only $17,000 when it's new.

Values Car A Car B
New $100,000 $17,000
1 Year $90,000 $14,000
2 Year $85,000 $12,000
3 Year $80,000 $10,000
4 Year $74,000 $8,500
5 Year $70,000 $7,000
Click for larger image

Looking at this graph and the table above, you can see that in retained value percentage terms, Car A is outperforming Car B by quite a lot; it's retained value is worth nearly 30 percentage points more by the end of its fifth year.

Click for larger image

However, the real story is possibly shown by this graph. This picture shows the cost of depreciation per year; and you can see that in every year Car B is costing much, much less than Car A. In fact, totalling the depreciation costs, Car B has dropped $10k in value over the five years, whereas Car A has lost $30k, or three times as much. For just the depreciation costs on Car A, you could have bought a Car B, not insured it, burnt it out, and bought another one!

Obviously, money isn't everything. You buy more expensive cars because they're more fun to drive, not because they have better resale. People claim to buy a Mercedes because they generally have great resale value, and that may be some enticement compared to other cars with the same cost when new. Yet when you look at it in pure dollar terms, a Hyundai Accent can actually have better resale by losing less value overall...

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