A new car: your worst investment

YOUR car is going down in value by thousands a month!

The chances are good that it dropped by 20% as you drove it off the showroom floor!

A car is the second biggest outlay most people make. It is a consumer durable, not an investment – but because it can impoverish over the long term, it could be called the worst investment.

Depreciation is the dirty word that the motor industry and the media seldom mention.

The table plots the one, two and three-year depreciation of a random sample of 23 cars. They range in price from the Nissan 1 400 at R70 000 to the Porsche Cayenne at R1,4m. The table compares the prices of these vehicles when they were new to their present trade-in value.

The worst example, the Jeep Cherokee Laredo V8 plummeted 38% in value from R382 000 to R237 500 in a year. That was R12 000 per month.

The best, ironically, the Porsche Cayenne, fell by only 11,9%. It doesn’t sound like much in percentage terms but in rands the drop was R175 000 – R14 500 a month!

One third of the sample depreciated by more than 30% in the first year. Less than a third fell in value by less than 20%.

The depreciation over two and three years is shown in columns three and six. It is, expressed in percentage decline per annum. The table shows that depreciation in years two and three starts to level off. Many cars these days can last 20 years.

This sample represents less than 10% of the cars available on the SA market. One cannot make judgments about any particular brand - but it does confirm that depreciation, though often unseen, makes fuel costs look trivial.

According to the latest vehicle statistics released by the National Association of Automobile Manufacturers of South Africa (NAAMSA), more than 200 000 new cars have been sold since January.

Tony Twine, director and senior economist at Econometrix, describes the life cycle of a car: “During the first year, the value of the car decreases at a steep rate. For the next four years, the car depreciates at a more gentle, slower pace, with a further step down in value in the sixth year. Beyond this, the value of the rate of depreciation flattens out.”

Borrowing money to purchase a depreciating asset is the worst “investment” you can make. Sages say: “Buy things that appreciate and pay for the use of the things that depreciate.”

“A car is not an investment; you use it and then discard it”, says Piet Viljoen of Regarding Capital Management (RE:CM).

He says the definition of an investment is a security of principal, with the potential of growth and this does not apply to a car, explains Viljoen.

“Each person will do what they want to maximise their own value or utility”, says Viljoen.

A new car usually involves allocating a large amount of money into a diminishing asset.

Opportunity cost must be taken into account. Deciding to buy a luxury model now can detract significantly from one’s wealth in later life.

“If a person prefers to buy a fancy car as opposed to investing a portion, they must realise they will fall behind in the wealth accumulation stakes”, adds Viljoen.

People should think more carefully about the objectives of having a car, reckons Twine.

“They are swept along by the emotion of a brand new car and don’t take into account what the car is going to be used for,” warns Twine.

Twine advises leasing if the car is to be used purely as a means of transport. “This will decrease the costs of owning the use of a car, rather than the vehicle itself”.

Up to now, leasing has been restricted to companies and professionals who use their vehicles to generate income. The new Consumer Credit Bill, which is likely to come into effect in 2007, will allow for private leasing.

After owning the car for six years, the car will be worth around 20% of its original value, excluding VAT, adds Twine. A brand new car worth R500 000 will be worth about R100 000 after six years, if you are lucky.

“To avoid the early rapid depreciation of a new vehicle, rather buy a second-hand car,” advises Twine.

Let’s look at the numbers: instead of spending R500 000 on a new car, one could buy a three-year-old model of the same type for R300 000 and invest the balance.

The cost of ownership of the new car is R400 000 during the period. Meanwhile the R300 000 car after seven years will be worth R60 000, so the depreciation cost will be R240 000. At only 4,2% a year after tax, a R200 000 money market investment would have grown over six years to R256 000. The second-hand car owner is thus ahead by R16 000 while the new car owner is down by R400 000. Had the second hand car buyer put the money into the JSE, the relative situation would have been far better.

Some makes and models depreciate faster and this all depends on market forces, says a statistician who monitors car values.

“If the market likes it, will depreciate more slowly,” he reckons.

He adds that the technology race is over and the reliability of a particular is no longer a factor. Whether a car holds its value depends more on what car the public would like to be seen in. Reputation of the brand is critical.

Lower-priced vehicles suffer less depreciation because a larger number of prospective second hand buyers can afford them, says Twine.

Twine says the rate of increase of new car prices in the future determines how fast a particular make and model will depreciate.

He maintains that “the higher car inflation is, the greater the residual value and the lower the depreciation”.

Other factors do affect the rate of depreciation, he adds. “Historically, the slowest depreciation of vehicles hangs around the 1800cc engine size, manual transmissions and diesel engines”.

Sources: recommended retail price figures from Car Magazine editions from 2003-2005. Trade values from TransUnion Mead & McGrouther Auto dealers Guide.

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