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.

http://www.moneyweb.co.za/mw/view/mw/en/page62053?oid=38649&sn=Daily%20news%20Detail

Has your car lost half of its value?

Some cars on the SA market lose up to half their value in one year according to a study of car depreciation by Moneyweb, including certain Renaults, Chryslers and Nissans.

Depreciation is often the most expensive component of car cost in the early months of a car's life.

It found that Volkswagen, Mercedes-Benz and Porsche held their value best in percentage terms while three models of Renault's Laguna range lost the most value in the first year.

The Laguna 3.0 Privilege depreciated by 52 percent and the Laguna 2.0 Expression by 49 percent.

Other poor performers were Chrysler's Crossfire sports car which plummeted in value by more than 40 percent, while the Nissan Almera lost 38 percent of its new value in a year.

The table is split into two pages – car manufacturers A-L and M-Z - and is based on Trans-Union's Auto Dealers' Guide, the "bible" of used car values, which uses real prices paid for cars across the country as a reference for car dealers.

It compares the new prices of vehicles to their present trade value and expresses the depreciation as a percentage, based on a car in standard condition with an average mileage.

Econometrix analyst Tony Twine said: "A car's residual value is hit heavily in the year it's discontinued; its value is lower than usual a year later but by the third year it's more or less back to normal."

Another motoring analyst said Nissan's volume models depreciated badly due to huge sales to the rental industry at severely discounted price; these cars were then dumped on the dealer network after their time with the rental companies.

He added: "Almeras also suffered from a falsely inflated new list price to make them appear to be priced along with their competitors. However, the real price you paid was always way below the stated retail price."

The car that held its value best was the Porsche 911 Carrera Cabriolet which depreciated by 9.49 percent in a year - a modest percentage, although a rather steep R94 425 in rand terms.

The next best value-holder was the Mercedes ML SUV at 10 percent in one year. The Porsche and VW stables had the most models with the lowest depreciation.

Data disputed

The average depreciation of the 824 vehicles surveyed was 22 percent in the first year compared to 27.16 percent in 2005.

Twin said many manufacturers and dealers disputed the use of the Auto Dealers' Guide figures in the survey but could not offer a substitute as no other statistics exist in the motoring industry.

"When you trade in your car, the first thing dealers take out of their pocket is this guide. They seldom budge from the figures when working out a trade-in value."

http://www.motoring.co.za/index.php?fArticleId=3742521&fSectionId=751&fSetId=381

Image A-L Click on the Image to enlarge
Image M-Z Click on the Image to enlarge