You too can play at the car depreciation game
A tightness in the supply of used cars means now is a very good time to buy new, writes John Cradden
Published 14/06/2015 | 02:30
If you've been thinking about a new car, the start of the '152' registrations next month may well be weighing on your mind. A new car represents the second biggest purchase most of us will make after a house, so it's a big investment whatever way you look at it.
Although the greater availability and range of car financing options may bring a new car within your financial reach, what might also be stopping you putting your name down as a car's first owner is the single biggest - and the least predictable - cost of running a new car: depreciation.
But while you can never fully beat the scourge of car depreciation, there are loads of ways you can save thousands - and not just on new cars.
But first, some good news for anyone with a car they want to trade in for a new model. According to the experts at car history checking service, Motorcheck.ie, the average Irish car depreciation 'curve' is levelling out.
In its most recent study of average car market values, the company found that the average forecourt price of a three-year-old car in 2014 was 16.5pc more expensive than the equivalent three-year-old car in 2010, and that the price for a five-year-old car in 2014 was 37pc more than the equivalent five-year-old car four years previously.
"The depreciation of used cars has slowed down and flattened out to such an extent over the past five years - largely due to lack of availability of used car stock - that the knock-on effect has been price inflation in used stock, relative to what we were paying back in the days when there was plentiful stock," said managing director Michael Rochford.
Sales of new cars fell off a cliff in 2009, when just 60,000 cars were sold compared with 142,000 the previous year - a drop of about 60pc.
Mr Rochford says the reason why the values of three-year old cars didn't stiffen as much as five-year-old cars last year is that new car sales had recovered a little by 2011 to 90,000, so there was a slightly better supply of them at that stage.
Another factor that helped supply in the intervening years was a small but steady rise in the already strong numbers of used car imports from the UK (around 50,000-55,000). But the strengthening of sterling against the euro over the last year means that such imports are now a lot less attractive for both dealers and ordinary punters.
Used car imports in May 2015 were down 27pc on last year and overall have fallen by 13pc since the start of the year, according to the CSO.
What this all means is that it's currently a seller's market, so if you want to trade in today for a 152 car you'll get a much better price than you would have done for the same car three years ago - even if it's a 10-year-old banger.
But to be sure of minimising your losses from depreciation - assuming you don't intend to keep the car until it's only fit for the scrapyard - here are a few things to bear in mind.
Choose make and model carefully
One of the most interesting findings from Motorcheck's annual used car survey, which analyses the 'residual value' performance of the top six best-selling models in 12 different segments, is that no single car brand significantly outperforms any other in terms of resale values.
"There was not much difference between the traditional favourites, such as VW and Toyota, but the surprise was Hyundai," said Mr Rochford. "As a brand it was very much in evidence due its presence in many of the segments as a high-volume seller but it also performed very well in terms of residual value."
He agrees that the French and Italian brands don't tend to hold their value as well as the Japanese, Koreans or the Germans do. But even so, buying a popular model can be a double-edged sword he warned.
"Sometimes the popularity of a particular model of car can lead to the residual value suffering - largely due to an oversupply of them on the market", said Mr Rochford. "However this is not something we are experiencing right now."
Another thing to consider is a model's lifecycle, he said. "If you buy a car, even one with a traditionally strong residual value, and it is replaced by a new model before you resell it, you can expect the car's value to be a bit lower than it traditionally would have been."
However, some makers are able to manage the market transition between an old and new model more smoothly than others.
"Marques such as VW have been masters of maintaining the bloodline of the original Golf by never drastically changing the look and feel and, as a result, the residual value of an older model Golf is never totally destroyed by the introduction of a new model," said Mr Rochford.
But if you want something a bit different, a 'niche' model could pay dividends from a depreciation point of view.
The Fiat 500 is part of the 'A' market segment (city cars) that accounts for only 2.5pc of overall car sales, but it's a good example of a car that has a "certain stylishness, sexiness or quirkiness", making them sought after and desirable by a small but highly targeted sector of the market - although they sell better in the summer time, as do convertible models, adds Mr Rochford.
What about electrics and hybrids?
"Again, I think this is the fact that these cars appeal to a certain niche of the market and since there is not a high volume of these available, due to relatively poor sales of electric and hybrids in the new car market, demand in the used car market tends to outstrip supply."
Whatever car you buy, the one thing you can do to help keep up its resale value is to keep a fully documented service history with the dealer and/or independent garage later in the car's life.
"The history or provenance of the car is very important, so a well-documented history helps a lot."
It might surprise you to know that going for the increasing popular form of car finance called PCP (personal contract plan) is one way to minimise car depreciation - and there is some logic to it.
A PCP is essentially a form of long-term car hire - in that, unlike a hire purchase deal, you will never own the car, so you are only making repayments on the car's depreciation rather than its full capital value. This means that the repayments are typically a lot lower than is the case with HP.
But the key thing here is that the car's residual value is underwritten by the manufacturer.
"If a manufacturer says that the car will be worth €10k in 2018 and the market in three years' time is only fetching, say, €9k for similar vehicles, then the manufacturer takes the hit," says Mr Rochford.
If the car is found to be worth more than €10k, then you can use any positive equity above that to put towards another new car, if you want.
This last piece of information might annoy you if you don't live in Dublin, but it seems to be true and confirms what many of us suspect.
Car dealers in Dublin and greater Dublin will pay hundreds, even a grand more, for a used car with a 'D' plate than a similar model with a plate from any of the outlying counties of Ireland.
"It's a relatively small factor for many people when buying a car, but Dublin dealers know that when selling two identical cars side by side, the one with the D plate tends to move off the forecourt slightly quicker," said Rochford.
"The important thing for a dealer is to keep their stock turning over, so if a car spends an extra few days sitting on a forecourt, it can hurt."
Depreciation beaters #2: buy nearly new, or buy a banger
Buying used is the way most of us beat the worst of new car depreciation - but you may need to do your homework more carefully, as the supply of used car stock that we had during the Noughties is no longer as bountiful and bargains possibly harder to come by.
A car's value naturally depreciates throughout its life, but it's well known that the sharpest period of depreciation is in the first two or three years. In fact, you will lose hundreds - if not thousands - of euro on the average new car the moment you drive it home from the car showroom. So buying a demo model or a one-year-old car is likely to save you a huge chunk of wedge.
The case for buying at three or five years old - at least at the moment - may be less attractive than it was three years ago, and even 10-year-old cars cost 52pc more than in 2010, according to car history checkers Motorcheck.ie.
But the case for 'bangernomics' remains sound. Bangernomics, according to its exponents, is about buying a decent used car for as little as possible that still has lots of usable life left. Naturally, this means buying a car that's around 10 years old or more, but the ideal seems to be to find a well-looked-after BMW, Mercedes, Lexus, Volvo or Audi and trade off the higher running costs (namely fuel, tax and insurance) with how little you pay for the car.
The term was first coined many years ago by UK motoring journalist and editor of FreeCarMag, James Ruppert. The traditional consensus among Irish followers (they can be found on Boards.ie) is that you should pay no more than €2,000 but, right now, €3,000 might give you more options.
Indeed, if you're determined to get the most bang for your buck at the blunt end of the used car market, now is a good time because the collapse in new car sales in 2009 means that the supply of post-2008 cars could become very weak by 2018.
Finally, if you want to buy from a dealer, time your visits for May or June or October or November, as these are now the quietest times of the year for them and they'll be more happier to do a better deal to keep their sales numbers up.
Sunday Indo Business