My understanding is a car will lose roughly 50% of its value by the first 2-3 years.
Is the rate of depreciation faster for luxury automotives than for more economical cars (compact or midsize sedans for example)?
Since a lot of people who buy a new luxury auto do so because they have tons of disposable income, and because they like the status of a new car, I’d assume expensive luxury autos and sports cars would depreciate faster. Is that the case, or is the rate of depreciation after 2-4 years about the same between a 90k luxury sedan and a 25k family sedan?
I wonder if even that’s still true. From observation of the used car market around here, 3 year old cars with 25-35K miles (basically stuff coming off lease) on them seem to have an asking price about 75% of the new value. That could be a local market issue, or confirmation bias, or just wrong, but 50% seems like a lot.
The exception is things like all-electric vehicles, which seem to lose more like 65% of their price in three years, although even that’s complicated by things like the $7500 tax credit that’s available for new but not used ones.
So far as I can tell from a very small number of data points, (mostly BMWs around here for some reason), the “high status” cars depreciate a little less than their more ordinary counterparts.
The bad economy is causing people to hold onto used cars, and the cash for clunkers program destroyed hundreds of thousands of used cars, both of which drove up prices in the used car market.
But from what I’ve seen if you shop around you can get a 3 year old car for half the cost of a new one.
In general, the more pricey & status-laden a car is, the more likely it is to be owned by a certain “sort” of person. The guy who rolls a $250k Bentley Flying Spur isn’t using the car as a practical runabout and grocery-getter, he is making a statement about his preferences for refinement, rarity, and willingness to spend money like it doesn’t really matter. And of course, he got it new! Why would he buy somebody else’s buttsweat when he doesn’t have to?
So, who’s gonna buy an aging 3 year old Bentley? Other “Bentley guys” will be shopping in the showroom for the new ones. So the buyer is going to be someone a few pegs down on the economic ladder. Someone with maybe $150 grand in his hand who can “do better” than an Avalon, or even one of those Jaguar XJ that the proles drive. Someone who wants to be seen in a Bentley, but the people seeing him in it won’t recognize it as one he did not get new, because the people seeing him are clients (because he still works for a living). He is a budding hopeful Bentley guy, but not yet a true Bentley guy for whom money is a vulgar discussion topic.
And you won’t be buying that used Bentley from Bentley Guy, because money is vulgar and he has neither the time nor inclination to quibble nickels and dimes at his residence with strangers from who knows where! No, you will be buying it from the dealer who took it off his hands in trade for the NEW new Bentley he drove off in. The dealer will see you checking out the 2018 XJ, you’ll smugly advise this will be a cash purchase and an anniversary gift for the missus for your upcoming trip to wine country. And you will hear the devil hiss in your ear, “This is indeed a fine vehicle, but for practically the same price wouldn’t you prefer…a Bentley?”
I ran some numbers, but before I get to those, my guesses were:
Used luxury cars would have depreciated the worst because the biggest reason to buy a luxury car is to show off how successful you are. Buying a used car doesn’t scream success to most people. Plus with the complexity of maintaining high-end used cars at luxury car dealership rates, I would have thought maintenance costs would have dissuaded second-hand buyers and pushed the used prices down. New car buyers also pay get “free” maintenance, which of course is built into the new purchase price but doesn’t benefit the used buyer, so would show up as greater depreciation over the first few years.
I also would have assumed that the depreciation rate for the cheapest new cars would be higher than average. These are cheap cars that will feel even cheaper after a few years and people buying the most basic transportation possible might not be the best at maintenance. Because they are cheap, I doubt dealers will spend more than the minimum amount to recondition them in the used market (e.g., repaint scratches), further pushing down used prices. These are also most likely to be repossessed, meaning more likely to go to auction with depressed values.
I would have assumed that depreciation for bog-standard mid-size sedans would be the lowest because people buying mid-size sedans are basically making the most practical choice. Ironically, the most practical choice though is to buy a used car, so there are probably lots of practical car shoppers willing to buy a few year old practical car instead of a new one. Thus, a good-quality used mid-size car probably attracts lots of buyers who just want practical transportation and aren’t emotionally wedded to new car smell.
Then I ran a few numbers, looking at the “fair purchase price” and 5-year depreciation rates on kbb.com (5-Year Cost To Own | Kelley Blue Book) for several categories of cars. I excluded SUVs/crossovers and electric cars. I looked at only those cars with the lowest cost of ownership which likely biases depreciation downward. I am hoping thought that the downward bias is roughly the same for each category of cars.
The results showed five-year expected depreciation for each category is (from most depreciation to least):
Subcompact cars: 79.5%
Entry-level luxury cars: 73.4%
Compact cars: 73.0%
Luxury cars: 71.9%
Full-size cars: 70.3%
Mid-size cars: 66.8%
So, it looks like the cheapest cars (subcompacts) depreciate the worst, rather than luxury cars. On the whole, luxury cars depreciate worse than the bulk of boring mid-size and large sedans.
Maybe luxury cars benefit in the used market because they at least benefit from professional maintenance. Generally, the luxury car makes include free maintenance for the first umpteen years with purchase and the buyers are probably likely to continue dealer maintenance for some time. This might help their values out a bit relative to subcompact cars in the used market.
In their view from a few years ago, the big issue with used car prices is that the recession pushed down new car sales. As a result, there are fewer decent used cars in the succeeding years to choose from.
In my view, the cars that were traded in under cash for clunkers would, by now, generally be 20-year trash heaps that would have either already been in or immediately destined for the junkyard. If anything, cash for clunkers probably helped sell a few new cars in 2009 and 2010 that are reasonable used cars now adding to the used car supply and pushing prices down.
Doing a quick look around this area, and checking with some relatives east where seriously top end cars are a little more common, luxury cars initially depreciate a a little faster at first but them hit a sort of shelf for a few years. Condition, miles and everything comes into play of course but if you are in the “new car every two years” crowd you look to be taking a bigger hit at the top end than middle to lower end.
Note that this isn’t consistent with your claim above.
Sometimes, with effort, being able to find a 3-year-old car for 50% of its new value means that the average depreciation is less than that after 3 years, and it’s almost certainly less after 2 years.
And trying to compare apples to apples as best possible (luxury compact SUV vs compact SUV, etc) I don’t see a whole lot of variation between the depreciation of the luxury and non-luxury cars after 3 years. There’s far more variation of trucks holding value better than sedans.
But these are generally comparisons of the best residual value in each class, so that could be misleading.
As the posts citing actual numbers have shown, ‘luxury cars’ don’t consistently depreciate faster. Trucks, particularly pick up trucks but also some SUV’s, depreciate more slowly than cars. That’s the starkest difference among different types of vehicle. Beyond that luxury sedans seem to be in the thick of things depending what you compare them to, how long a period, and how you’re actually defining ‘high status car’. Some people buy limited production multi-$100k+ cars and store them hoping for appreciation. Not arguing it’s the soundest investment necessarily, but it’s based on reality of some past cases.
Looking around for other sources I was even surprised to see in 2016 Edmunds had the BMW M3 as best value retaining ‘luxury car’. Conventional wisdom tends to be that BMW M cars depreciate especially fast.
Perhaps some of it is just that a more expensive car will decline more in absolute $'s. You’d think people would correct for that in their perceptions, but maybe they don’t fully. Also some people who can’t afford expensive cars have a generally sour grapes attitude toward them.