February 15, 2013 5:15 PM | By Mark Toljagic for MSN Autos

Why new cars lose their value so fast

Your loss is her gain. (© Photo: JGI, Jamie Grill)

Why do cars lose so much money so quickly?

Buy smartly and you can make depreciation less depressing

Contemplating buying a new car? The unfortunate downside of the experience is not the sales rep's hackneyed opening lines or the stale showroom coffee, but the financial hit you'll take the moment you drive your new pride and joy off the lot.

Wise consumers know the biggest expense of a new car is depreciation — that pecuniary penance that devalues your new ride as soon as you sign the ownership papers. One U.S. consumer website estimates buyers lose an average 11 per cent of their new car's value while the ink is drying. After just two years, one-third of the purchase price has evaporated into thin air — that's $10,000 of a $30,000 purchase.

The first year sees the most precipitous drop. Discounted or not, you've paid the retail price of the vehicle - a transaction price that won't be duplicated again in the car's lifetime. The dealer is only obliged to give you the wholesale value for it. The depreciation typically amounts to thousands of dollars. You can try selling it at the retail price, but no buyer will likely pay a private seller anything close to the original sticker price. To add insult to injury, the money you forked over for tax, delivery and other fees can't be recouped.

If you're intent on buying a brand-new vehicle, the key is to make an informed purchase by becoming familiar with the factors that contribute to depreciation, and why some cars tend to shed value quicker than others. Thanks to the Internet and numerous helpful websites like this one, Canadian consumers have never been more knowledgeable about the car business.

Buying a car that's in demand also helps. (© Photo: Subaru)

Buying a car that will remain in demand also helps.

Canadian Black Book, this country's go-to provider of vehicle valuations distributed to dealers, insurance companies and financial institutions, began its annual Best Retained Value Awards in 2006, drawing consumers' attention to vehicles in 17 categories that retain the highest percentage of their original MSRP over the past four years. Rather than attempting to predict future depreciation, CBB tracked actual depreciation rates of 2008-model-year vehicles to determine the 2012 winners.

The net result? The Japanese nameplates continue to hold their value very well. Toyota, Lexus, Subaru and Honda combined to win 11 first-place finishes, while European automakers clinched four and the domestic manufacturers held their own with three wins. The CBB awards have resonated with Canadians, and they're paying close attention.

"We've managed to raise the subject — the cost of depreciation — with the public who up until recently have been preoccupied with monthly payments and fuel-economy ratings," says Josh Bailey, Canadian Black Book's vice-president of research.

There are numerous factors that influence vehicle depreciation rates, says George Iny, president of the pro-consumer Automobile Protection Association.

  • Reliability counts for a lot and it takes years to build a bankable reputation. Hyundai has been operating in Canada for almost 30 years and is only now coming into its own. Suzuki, Kia and Mitsubishi still have a way to go. Then there's the corollary involving long-established brands. "Volkswagen products are coveted and have superior resale value, but they're not particularly reliable," says Iny. As the CBB awards show, buy into the brands that enjoy a reputation for quality, because they'll be in demand in the resale market.
  • Supply of vehicles in the used-car market has a big impact on depreciation rates. Years that saw a lot of leases written will inevitably bring plenty of product back into the market three and four years later, depressing prices significantly. Rental-car favourites - domestic products like the Chevrolet Malibu and Dodge Grand Caravan - are typically sold off after two years of fleet service, undermining resale values for everyone owning those models.
  • Acquisition costs make a difference: if the model is expensive when new, it will lose value more quickly, because the secondary market is not prepared to pay much over $25,000 for a used vehicle, says Iny. Luxury cars and big SUVs typically plunge in value. Even vaunted nameplates like BMW lose more than you'd think. That's one reason why leasing is preferable to purchasing in the luxury market.

Secondary factors include the vehicle's product cycle that sees the demand for older models slump (along with their value) when the redesigned new generation is released; the state of the economy (the used-car market puts a higher premium on this than the new-car market, says Iny), and even the geographic region and season in which the purchase takes place.

Some products draw seasonal or time-sensitive interest, notes Iny. "New cars that offer style or emotional appeal over function may perform poorly on the used market where buyers place a higher value on utility," he says, pointing to niche models like the Chrysler Crossfire, or any convertible offered for sale in the fall.

Inconsistent branding itself can influence resale values. Branding and consumer loyalty are critical to any industry, but especially automobiles, says Toronto-based automotive advisory Mark Derry. "Many of the North American cars — especially the four-cylinder models — seem to change the name of the model quite often, which does not lend itself well to loyalty or buyer confidence," he points out. "If you look at the brands that remain consistent, such as the names of pickup trucks, resale tends to be much stronger."

Buy a big, expensive car, and you're sure to lose some money. (© Photo: Adam Gault, OJO images)

Surprisingly, there's evidence that the depreciation slide is not as steep right now as it has been. Used-vehicle prices are going up, says Iny, a reaction to the tightening supply of pre-owned vehicles in the immediate to mid-term future.

"Previously, we enjoyed several years of record-breaking new vehicles sales and leasing penetration. The two factors together worked to ensure abundant supply of used vehicles entering the market," explains Iny. With lots of lease returns and high turnover of new vehicles, the used-car market was brimming with choices, so prices — and vehicle valuations — softened.

"The economic collapse in 2008 killed car prices, especially in the larger SUVs and luxury models where the purchase is rarely based purely on utility. However, the drop in sales and even larger drop in leasing have now created a relative scarcity of three- to four-year-old vehicles entering the market today."

Add to that the advent of professional reselling standards: CarProof and other vehicle history services have helped correct the imbalance between buyer and seller in terms of vehicle data. More reliable information has reduced the risk involved in buying used, and consumers are prepared to pay more as a consequence, says Iny.

The net result has been an explosion in used-vehicle sales. New vehicles accounted for just 35 per cent of Canada's 4.45 million vehicle sales in 2010, while 65 per cent were bought used. And consider this: used-vehicle sales are growing rapidly — three million used vehicles changed hands last year, compared to about two million a decade ago — while new automobile sales have remained relatively stagnant.

Strong demand for used vehicles is good news, but it doesn't completely mitigate the corrosive effect of depreciation on vehicle valuations. What can owners do to staunch depreciation losses?

The longer you keep your car, the smaller a factor depreciation is. (© Getty Images)

The longer you keep your car, the smaller a factor depreciation is.

Iny recommends holding onto your present vehicle longer. By extending the ownership cycle past the end of the first five years, when depreciation is the highest component of ownership costs, it becomes less important. After the eighth year, depreciation is practically negligible. A well-chosen vehicle can run 12 years or more, mostly with routine maintenance. And it goes without saying (but we'll say it anyway): keep your car in pristine shape, because a well-cared-for vehicle will always fetch more money than a neglected vehicle in the used-car market.

When buying new, choose a model with the lowest-in-class depreciation, such as those identified by the Canadian Black Book awards and those highlighted by Kelley and ALG in the U.S. Once the purview of manufacturers and dealers exclusively, these metrics go a long way in helping consumers select the wisest buys in each automotive segment.

Or you can skip the new-car experience altogether and buy a used vehicle. Let the original owner absorb the big depreciation hit during the first few years of the vehicle's life, then pick it up for a good price. However, this strategy doesn't always work with popular, small imports like the Honda Civic because they hold their value so well. But it's a great strategy for luxury models, if you're prepared to give up some of the prestige that goes with driving the absolute latest model.

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