New-car values go up in smoke
08 October 2006

New car buyers will collectively lose over $1 billion in value over the next two years due to a spike in depreciation rates. Depreciation rates on new cars have risen sharply because the market has been flooded with new vehicles, many of which quickly turn up on the second-hand market.

The trend has been exacerbated by the tourism boom which has seen a flood of ex-rental cars add to the tens of thousands of nearly new ex-lease cars that reach the second-hand market each year, dragging down the resale value of used cars.

That has raised depreciation rates on new cars to up to 50% in their first two years, said Vern Whitehead of car valuer Redbook, which sells online car valuations through TradeMe. "After five years there's only about 20% of the value left in the vehicle, which is pretty horrific," he said.

The rise in depreciation on vehicles means that those who bought the 76,842 cars that were under a year old at the end of last year are collectively looking at a loss of value of up to $1.39 billion (assuming an average value of $36,225) in the first two years of their cars' lives.

After the initial plunge in value, providing a car was well maintained, it lost 10% of its value between the age of five and 12 years, Whitehead said.

With many cars bought on finance deals with finance rates of 14% and higher, the cost to many new car-buyers will be much higher. The sharp rise in depreciation is focusing motorists' minds on how to at least minimise its ravages on their wallets.

Whitehead said it made more sense than ever to let someone else take the initial big depreciation hit and buy nearly new cars. Others choose to avoid depreciation and buy a car that is at least five years old and drive it until it dies, a practice known as bangernomics in the UK.

But the trouble with taking that route, said Automobile Association technical advice manager Jack Biddle, was the older a car got, the greater the chance of costly mechanical failures. Ex-lease cars and ex-rentals are the choice of many.

Lance Manins, from Driveline, which leases and sells vehicles to businesses and the public, said the fact they were New Zealand-new vehicles was also attractive because "when they come to sell that's what people would rather buy". He said the mileage could be low on used imports, but 10,000km on the clock could mean 100,000km worth of engine hours spent in traffic jams.

For those buying new, deals are crucial. Those who negotiate better prices on the forecourt or buy smartly through middle men to negotiate good prices are less prone to depreciation. And different makes fare differently with depreciation.

Whitehead said Daewoo cars lost about 50% of their value in the first year, which made them good value on the secondhand market after a year compared with older used Japanese imports. Mini Coopers, because of their desirability and design, retained 40% of their value after five years.

Lease deals are one way of managing depreciation, but they are not well understood by the public. Those with businesses, or the self-employed, who use their vehicles for work, can receive tax write-offs. Manins said they could either write off some of the depreciation or some of the leasing costs.

Just how fast the value in a car disappears is shown by the example of a Holden Commodore Executive Sedan bought new in 2004 for $44,200. It is now worth about $21,000 retail - depreciation of 52.5%.

- Sunday Star Times