When you drive a new car off the lot, its value starts to drop almost immediately. This is known as depreciation and is a critical factor to consider whether you’re buying a new or used car.
Immediate Drop in Value
As soon as you purchase a new car and drive it home, it’s no longer considered “new.” This instant transition causes a significant drop in its market value. On average, a new car loses about 20-30% of its value within the first year of ownership.
Wear And Tear
Every kilometre you drive adds to the wear and tear on your vehicle. This natural degradation affects everything from the tyres to the engine and interior materials. Over time, these factors diminish the car’s overall condition and value.
Vehicle Type
Some car fuel types depreciate quicker than others, usually due to a decrease in reliability at a certain age or km. This is especially prevalent in electric cars, which is the fastest-depreciating fuel type.
Car Depreciation By Fuel Type
| Fuel Type | Historical Depreciation Rate | Current Trend in New Zealand |
|---|---|---|
| Diesel | Slow | Slow due to continued reliability and efficiency |
| Petrol | Moderate | Fast due to the CCD subsidy being removed and the introduction of RUC. |
| Hybrid | Slow | Slow as popularity increases and technology matures |
| Electric | Slow | Fast due to CCD subsidy being removed and the introduction of RUC. |
| PHEVs | Slow | Fast due to rapid changes in technology and the introduction of RUC. |
Technological Advancements
The automotive industry is constantly evolving, with new models boasting advanced technology and features. As newer models hit the market with better fuel efficiency, safety features, and in-car technology, older models become less appealing to buyers, further depreciating their value.
Market Demand and Supply
The value of a car is also influenced by market demand and supply. Certain makes and models may depreciate faster if they fall out of favour with consumers or if the market becomes saturated with them. Conversely, cars that are in high demand or are limited in supply may retain their value better.
Brand Perception
The brand of your car can significantly impact its depreciation rate. Luxury brands often depreciate faster than more affordable brands due to their higher initial cost and maintenance expenses. However, some brands are known for their reliability and longevity, which can help them hold their value better over time.
Mileage
High mileage is one of the most significant factors in car depreciation. The more kilometres on the odometer, the lower the car’s resale value. This is because high mileage typically means more wear and tear and a shorter remaining lifespan for the vehicle.
Economic Factors
Broader economic conditions can also affect car depreciation. Factors such as fuel prices, interest rates, and economic stability can influence consumer purchasing behaviour and, consequently, the demand for used cars. For example, during an economic downturn, the demand for new cars may decrease, leading to slower depreciation for used cars as they become a more attractive option for buyers.
Condition and Maintenance
A car that has been well-maintained and is in excellent condition will depreciate slower than a car that has been neglected. Regular servicing, keeping detailed maintenance records, and addressing any issues promptly can help maintain a car’s value. Additionally, factors like the car’s appearance, cleanliness, and absence of significant damage all play a role in its depreciation rate.
Depreciation Schedule Example Table:
| Year | Depreciation Rate (%) | Depreciated Value (%) |
|---|---|---|
| 1 | 20% | 80% |
| 2 | 15% | 68% |
| 3 | 15% | 57% |
| 4 | 10% | 51% |
| 5 | 10% | 46% |
Example Calculation:
If a car is purchased for $30,000, the depreciation schedule would look like this:
| Year | Depreciation Rate (%) | Depreciated Value ($) | Remaining Value ($) |
|---|---|---|---|
| 1 | 20% | $6,000 | $24,000 |
| 2 | 15% | $4,500 | $19,500 |
| 3 | 15% | $4,500 | $15,000 |
| 4 | 10% | $3,000 | $12,000 |
| 5 | 10% | $3,000 | $9,000 |
Notes:
- The depreciation rate is higher in the first year and gradually decreases.
- This is a simplified model and actual depreciation can vary based on multiple factors.
- The remaining value is calculated by subtracting the depreciated value from the previous year’s remaining value.
Conclusion
Understanding car depreciation can help you make smarter financial decisions when buying or selling a vehicle. While depreciation is inevitable, choosing the right make and model, maintaining your car properly, and keeping an eye on market trends can help you mitigate its impact. Whether you’re eyeing a brand-new car or considering a pre-loved gem, being aware of these factors will ensure you get the best value for your investment.
