Why do cars depreciate in value so quickly?

[Aljsv]

New cars are generally the most expensive purchase after a house for most people. However, unlike a house, the value of cars that most of us buy falls like a stone from the day we drive them away from the garage.

Who is producing the ‘black book(s)’ values of 2nd hand cars, and how do they do it?

Surely a process that affects all car owners, involving £millions if not £billions of pounds of trade, should be completely transparent with all those involved in the process known.

[Laird Scooby]

Originally Posted by Aljsv

New cars are generally the most expensive purchase after a house for most people. However, unlike a house, the value of cars that most of us buy falls like a stone from the day we drive them away from the garage.

Who is producing the ‘black book(s)’ values of 2nd hand cars, and how do they do it?

Surely a process that affects all car owners, involving £millions if not £billions of pounds of trade, should be completely transparent with all those involved in the process known.

The obvious big difference is a house is about 10 times the cost of a car, people would soon complain if their new £800k house had £300k wiped off the value as soon as they unlocked the front door for the first time!

That said, people will happily pay a premium to be the first to turn the key in the ignition (or press a button ) to start the engine of a new car.

As soon as that happens, it becomes used and isn't as easy to sell. Hence roughly 1/3 of the value disappearing as soon as you drive off the forecourt. Various mechanical components wear on a car, unlike a house and cost disproportionate amounts compared to the cars residual value to replace. For example, a new engine might be £2k for a 5 year old car that is potentially worth £7k on a dealers forecourt. With fitting costs, fluids etc that engine is going to be more like £3k cost to the dealer. He still wants to make a profit so would be looking to buy that car with a worn/knackered engine for sub £1k.

Even if the engine was good with full dealer service history, he would still want to build ~£3k profit into it so knock off the cost of a warranty (~£1k) and he would look at paying no more than £3k for the car, less of course a bit for servicing, valeting, any repairs, tyres etc needed to put a new MoT on for the purchaser.

In reality, that means a trade-in value of £2.5k tops.

Glasses are generally the people who put together the trade-only used car price guide. Other such as Parkers (if they're still around) sell used car price guides to the public, often with vastly different figures to the Glasses Guide.

Cars wear out as they get older, even Volvo only give an expected lifespan of ~18 years. Houses on the other hand are expected to stay standing for centuries barring natural disasters, acts of war and similar.

Also as various areas become "more fashionable" for various reasons (employment, schools, countryside or any other of myriad reasons), house values rise more sharply in those areas than others. As people progress through life and get pay increases, whether by changing jobs, promotion etc their ability to get ever bigger mortgages increases so they always look to buy more valuable houses. Also some people buy houses cheaply in need of renovation/modernisation, do the work themselves and sit on them for a year or two then sell at a vast profit to enhance their buying power for their next house.

I'm not sure all this answers your questions but hopefully gives you an insight into the how and why.

[Forg]

Originally Posted by Aljsv

New cars are generally the most expensive purchase after a house for most people. However, unlike a house, the value of cars that most of us buy falls like a stone from the day we drive them away from the garage.

The part of the house which is equivalent to a car is just the building - that depreciates. Not quite as quickly as a car, but that's because the building should last a lot longer than a car.
The only reason a house (or apartment) goes up in value at all is because the land it's sitting on is going up in value, and land-area is finite - can't really "make more" ... without leaving the planet.

Who is producing the ‘black book(s)’ values of 2nd hand cars, and how do they do it?

Surely a process that affects all car owners, involving £millions if not £billions of pounds of trade, should be completely transparent with all those involved in the process known.

Those values are only guides, the actual indicator of what a used car is worth is what people will pay for them.

The values in the guides come from the amounts that people have paid. The prices are usually obtained from auction results, dealer sale prices, and asking-prices in ads can be kinda/sorta used but they're not accurate. There aren't always sales figures for every single spec-level of every single model of every single make of every single year, so sometimes extrapolations are made - for example if there were only 3 spec-levels of 2018 Volvo XC40, and a top-level example sells for X and the base-level sells for Y then it's a pretty good guess that the middle-level would be worth an amount in between.

This does lead to rarer models sometimes being a bit out-of-whack in those guides from time to time, due simply to a lack of data.

Don't forget, though, that these guides are NOT setting used values. They are reporting used values, and can only ever be an estimate. The thing which sets the used values is the amount that vehicles actually sell for.

[eternal optimist]

Originally Posted by Aljsv

New cars are generally the most expensive purchase after a house for most people. However, unlike a house, the value of cars that most of us buy falls like a stone from the day we drive them away from the garage.

Who is producing the ‘black book(s)’ values of 2nd hand cars, and how do they do it?

Surely a process that affects all car owners, involving £millions if not £billions of pounds of trade, should be completely transparent with all those involved in the process known.

You seem to be implying that someone, somewhere writes down a number and that then determines what a secondhand car is worth? All that CAP does is capture what’s happening in the market and record it as a guide for dealers. Any market relies on transparency for pricing - car auctions sell many thousands of cars each week, this is the basis of the information that gets compiled.

As to why is depreciation so high, it’s because the supply of cars is driven by the number of people ‘buying’ cars on PCP etc. I am hugely appreciative of them choosing to make it cheaper for me to buy secondhand cars, and long may it continue.

[tofufi]

Originally Posted by eternal optimist

As to why is depreciation so high, it’s because the supply of cars is driven by the number of people ‘buying’ cars on PCP etc.

This

The car manufacturers shift more cars this way.

A glut of cars on the market at 3 years old suppresses the values of these cars.

Supply and demand

Why would you buy a 3 year old car when similar monthly outlay gives you a brand new one?

(says me, whose newest car is 31 years old...)

[FunkyMelon]

Not to mention that models get superseded every few years making the older one less desirable, as well as all the other factors mentioned above.

[john.wigley]

I won't attempt to improve on the excellent responses to your question above 'Aljsv', but there are, as ever, two sides to every equation. The fact that cars do depreciate so heavily also means that a used one represents a (relative) bargain to subsequent purchasers.

Secondly, while inflation is unlikely to greatly affect the residual value of a motor-car (unless it is a vintage Rolls-Royce, for instance), it does have a bearing on that of a house, on account of the longer life-span already referenced by others.

Having said that, all things are relative. The original owners of our house paid c£4K as a new-build in 1969. You couldn't buy a new car for that today! We bought the house from them 12 years later, stretching ourselves to the limit, for £24.5K - the price of a mainstream car today. At the time, a nearly new Maxi set us back around £3K. Today, our house would probably sell for a little over £200K, but that is academic unless one is, like the people we bought it from, selling up to emigrate.

An exception to the above may be sited 'mobile' homes. We looked into buying one a few years back, but decided against it when we realised that even used ones (8-10 years / £25-£30K) fell in value like a lead balloon.

While an interesting exercise, I think comparing houses with cars in this way is rather akin to comparing apples with oranges!

Regards, John.

[Brimfull]

They are consumable goods that are designed to be thrown away and replaced as they age. So the older the product and higher mileage it has reflects in its value as its remaining life expectancy is seen to be shorter.

[Laird Scooby]

Originally Posted by john.wigley

Having said that, all things are relative. The original owners of our house paid c£4K as a new-build in 1969. You couldn't buy a new car for that today! We bought the house from them 12 years later, stretching ourselves to the limit, for £24.5K - the price of a mainstream car today. At the time, a nearly new Maxi set us back around £3K. Today, our house would probably sell for a little over £200K, but that is academic unless one is, like the people we bought it from, selling up to emigrate.


While an interesting exercise, I think comparing houses with cars in this way is rather akin to comparing apples with oranges!

Regards, John.

You've reminded me there John of my dad buying his first house in 1959 with a loan from the bank of £500 to buy it and restore it. This was done over a period of time but in 1971 he sold it for (i think) £12700. Through various other subsequent buyng and selling of houses at the right time, by 1976 he owned outright a house that sold later that year for £27k.
I've just looked the last house up on Zoopla, last sale was 2009 for £620k and the estimate of todays price is £956k - £1.17m - not bad for a £500 investment originally!

[Forrest]

Like most assumptions based on empirical data this depends a lot on what part of the curve you look at. There are plenty of examples on classic car sites of used cars selling for substantial multiples of their original new price. You just have to be patient and adopt a longer term strategy to see your investment to bear fruit!