As you stand at the petrol pump watching the dollars clickingover on the counter, think about what it’s really costing you to drive aroundin your car. It’s not the petrol. The big latent cost is depreciation â€“ whatyou paid for your pride and joy will in many cases turn into a lot less whenyou come to sell it or trade it in. In very broad terms, fuel purchasesaccount for around 10% of the total annual cost of owning and running anear-new car.
Over a three year period a new car is likely to lose betweena third and a half of its value. When you churn through the figures you’ll findthat that you burn through five to six times more in depreciation costs than infuel per year. Depreciation ticks away all the time; it’s just not as obviousas forking out cash to fill-up every week. But while the cost of petrol isrising depreciation costs are dwindling.
There are other costs associated with owning and running acar â€“ insurance, finance, repairs and maintenance, and registration (which has justgone up again). But whichever way you look at it, the big one is depreciation.
Depreciation reflects a number of factors but the obviousone is that the car simply wears out. Repairs and maintenance bills start toclimb, it becomes less reliable and gets a few dings and some coffee stains.
But depreciation is also driven by obsolescence. One of thebest current examples of this relates to another vital household item â€“ your TVset. When you can only see 80% of what’s happening on your old square set youget the message that technology has marched on leaving your current TV basicallyredundant.
In the case of a car, your 1990 model will probably not haveairbags, ABS, air conditioning a CD player, etc, etc â€“ all features that areregarded as must-haves in most late model cars. So when you go to sell ortrade-in your old car its value will be technologically challenged so to speak- it’s not only a little worn out, it’s patently obsolete.
Another factor that can have an important influence on what levelof depreciation new car buyers must wear is what happens to new car prices overthe time they own a car. If the price of a new car falls by say 10% over threeyears (Yeah Right, you might think, but read on) then clearly it would underminewhat you could possibly get for the car you bought new three years earlier.This phenomenon was a fact of life in the mid-1990s as the government slashedtariffs on new cars and eventually removed them altogether. Declining new carprices led to much faster rates of new car depreciation and forced manytraditional new car buyers to switch to the less punishing used car market,including used imports.
Thirteen years on, not only have depreciation rates slowed abit, but also the real value of a new car has declined significantly leading tolower depreciation costs in real terms and certainly relative to peoples’incomes. For instance, around 1995 a new mid-sized car might have set you backabout $30,000. By 1998, with all tariffs removed, that same car brand new mighthave cost nearer $27,000. That’s another $3,000 added to the normal rate ofdepreciation which was somewhere around 25%pa. In round terms you would havewiped out as much as $17,000 in just three years.
Today that same type of car would probably cost you in thevicinity of $28,000 but would have a lot more bells and whistles; in otherwords you’d be getting a lot more for your money. The rate of depreciation has probablycooled a bit and new car prices are likely to remain more-or-less stable overthe next three years. You’ll still lose around $15,000, but that’s less innominal terms than the $17,000 you lost between 1995-98 on your new car, andwhen you adjust the numbers for inflation over the last 13 years the cost ofdepreciation in real terms is considerably smaller.
The fact is the upfront cost of buying a brand new car hasfallen in nominal terms over the past 13 years and in real terms (taking intoaccount quality improvements as well as inflation) the fall has been substantial â€“ around 40%. This, together with milder rates of new car depreciation, ispersuading buyers back into the new car market, which for the third successiveyear has recorded sales of more than 75,000.
While depreciation remains the major cost of car ownership,it’s a far lower cost relative to peoples’ incomes today than it was in 1995.In contrast, to buy 50 litres of petrol to fill your tank will require 3.6hours work for somebody on the average wage compared to 2.9 hours back in 1995.Ouch! So despite the rise in the cost of refueling your new car the overallcost of owning and running it continues to fall in real terms thanks to thedecline in the rate of depreciation.