You’re probably aware of the rapid rate of depreciation that motor vehicles undergo starting the minute they’re driven off the lot. After you buy a new car and drive it any distance, the value plummets.
Every year after that, the value of the car or truck will decline further. Even if you spend a lot of time, money, and effort to keep the vehicle in good condition, there’s an inevitability to falling prices. The only exception is the rare instance when the car becomes a collector’s item.
This is such a common and accepted phenomenon that most people never stop to question it. Vehicles depreciate much more quickly and inevitably than most other assets.
Why is this the case? And is there any way around it?
Appreciation and Depreciation
Depreciation doesn’t happen to all assets. Some of them increase in value. That’s one of the reasons real estate investing is such a popular financial strategy.
Generally speaking, houses gain in value unless the entire region goes into a massive decline or the individual structure falls into disrepair. For most people in most places, though, it’s a given that the value of your home will rise, on average, over time.
This is a reliable quality of real estate and other assets as well, so many investors pour their capital into such holdings. Why don’t motor vehicles work the same way?
Factors That Work Against New Cars
Several key factors operate against new cars and the preservation or escalation of their value:
- The stigma of used models. Though there are signs the stigma is fading, most individuals harbor an inherent prejudice against used or second-hand items of any sort. A certain amount of prestige accompanies the purchase of a new vehicle, but to many people, buying a used car feels “dirty” in some irrational way. The moment a new car gets driven off the lot, it becomes “used,” and therefore less valuable. Granted, there are certain items for which this effect makes sense: most of us would not be eager to buy a used mattress or an old pair of shoes. In certain cases, the secondhand stigma isn’t a factor at all; most people have no problem buying an existing house, as opposed to constructing a new one. We can acknowledge this effect, but it’s not the only item in play.
- New technology. Technology advances every year. Some assets and possessions don’t inarguably benefit from new technologies the way that cars do. Each year, new vehicles on the market may boast of better safety standards, more modern technology, and new bells and whistles that are attractive to potential buyers. This is also the reason so many people rush out to buy the latest model of smartphone each year, even when their version of the preceding year’s model is a perfectly functional one. Still, a car from 2021 and a 2022 model aren’t apt to be radically different in terms of their technological sophistication, so this doesn’t explain everything either.
- Dealership markups. If you’re buying a new car, you’re probably shopping at a dealership. Car dealers are known for high and sometimes absurd markups. The exact amount is going to depend on the dealer and the model of vehicle you’re after, but it’s possible to reduce the markup through negotiation. Nevertheless, this phenomenon increases the amount of money you’re apt to spend on a new vehicle even though it doesn’t reflect an inherently higher value of the item in itself. The discrepancy becomes obvious whenever you receive an offer for your used vehicle.
- Deterioration and reliability. We also have to consider the potential for a car to deteriorate and grow less reliable over time. Trustworthy car manufacturers do their best to equip their vehicles with components designed to last a long time, but even if you take good care of your car, the complex assembly of moving parts will undoubtedly decline. Some of the signs won’t be evident from the outside, so buying a used vehicle can entail a bit of a risk. You don’t want to end up owning a used car that has hundreds of unforeseen flaws.
- A practically infinite supply. Another factor is that there’s an almost unlimited supply of vehicles, including new ones. This isn’t necessarily the case with other assets. There’s a finite amount of land in the world, so as the population increases, so does the demand for land. It’s only natural that the price will go up. The same is true of collector’s items for which there’s only a finite supply in circulation. Because new models of vehicles are released every year, and because, for the most part, demand is adequately sated, the value of vehicles is unlikely to rise, on average.
Many different factors may contribute to the quick and steady depreciation of vehicles. That doesn’t mean you should avoid new cars altogether, but you should definitely think critically about the vital financial decision of whether and when to buy one.