Car price equilibrium theory

Lforever saving on 05/02/2014 - 15:32

Cars.. an expensive fast depreciating asset that many will own in their lifetime.
I've just finished scrolling through carsales for the 100th time and I feel the same thing everytime. Cars are too damn expensive.
Of course you could always go older and more used.

My objective is to find a car to drive. However, if I were to buy a $1,000 car it may not work very long before I buy another or need to repair it to continue. Obviously, it would be worth paying more for a better conditioned car.

But if you buy a brand spankin' new car - you lose value as soon as you drive it out the dealers.

My question is this. Where is the equilibrium? Of course this varies from car to car and its condition. But as a general rule - percentage wise. Paying 100% (New car) and paying 0-30% (Very used) of a cars original value are the extremes.

My guess would be somewhere around 70% gets the most value for your money. Since the car wouldn't be too old - but when it does you can spend a smaller amount to repair it lasting a longer period of time than if you bought a new car at 100% cost.

What do you guys think? Am I making sense?

Automotive

Comments

  • lolmao on 05/02/2014 - 15:54

    I think around 50%, a few years old is the sweet spot

  • pinchies on 05/02/2014 - 16:00
    +2

    With personal preference for brands and models aside, and assuming the previous owners kept the car in cosmetic perfect condition, the first thing is what features did you want in the car - do you care about personal safety? Then a more recent car ('03+ generally) with ABS, EBD, Side airbags and traction control might be what you need. Did you want bluetooth? You're probably looking at '05+ then. These things would set a limit on the oldest car you would consider.

    After this, the milage on the car becomes the obvious primary metric for comparison. The miles the car has done can give you a pretty good idea of what will need to be replaced, and how much it will cost - certain services in the car's service schedule will be costly, and some things must be replaced before they fail rather than after (e.g. timing belt). Normal service (oil, filter) costs will be basically the same over the cars life, but as the car ages more major components will be needing replacement so the proportion of money used to maintain the car in relation to the cars value only increases over time. Because of this, you should be ready and willing to pay more for a car with low km's as it will save you significant money in maintenance costs. Once cars with only low km's are considered, the price premium between newer and older cars becomes noticeably less, and here is where you will find that personal preference comes into play again.

    TL;DR
    I think as for 0-100% of value, I would suggest that the most value would be found for the car with the lowest % of the original price possible, provided you find a model with low km's - this is generally fairly easy to do closer to the 30-50% range.

    • forever saving on 06/02/2014 - 08:43

      This was what I was thinking - that it may be worth it to buy newer simply to save on maintenance costs for a longer period of time.
      I just fear buying an older car and having to fix it after 6 months.
      But I was looking at Honda's and from what I hear they are built solidly and last long anyway.

  • mskeggs on 05/02/2014 - 16:00

    I think the general consensus is a 3yro car is over the most aggressive depreciation but still has a lot of life left.
    Personally, I buy 10yro Toyotas because I am cheap and I don't care about dings and scrapes or the look of the car.
    Nothing worse than when you put the first scratch in a brand new car.

  • battler on 05/02/2014 - 16:01
    +1

    must consider that some cars came with 5 year warranties, so a 2010/11 model may be worthwhile. 3-4 year old is probably around 50-70% but added advantage of factory warranty.

    • pinchies on 05/02/2014 - 16:03
      +1

      True, but remember that maintenance costs for the first few years are pretty cheap anyway, especially if you are not using a dealer.

  • _Bruce_ on 05/02/2014 - 16:14

    For pure value for money it is more like 20-30%. As others have mentioned there are many other factors.

  • arescarti42 on 05/02/2014 - 20:57
    +1

    This is exactly the same line of thinking I used when I bought my last car.

    The thing with modern mass produced cars is that if you take good care of them, they'll typically be super reliable and last for ages, particularly the brands with a reputation for reliability and quality (e.g. most Japanese brands).

    So probably the best way to approach it is to try and find a model with a proven reliability record, and then look for one in good condition that has been looked after really well. For example, some old lady's 1995 Toyota Corolla might only sell for $2500, but if it's been meticulously maintained all its life then you can probably expect it'll provide you with many years of inexpensive motoring.

    Mileage and age are also less important than you might think, an older high mileage car that has been well maintained is almost always going to be much better than a low mileage car that has been neglected (within reason).

    In the end I bought a 2004 model Nissan X-trail with ~160k km for ~$7500 (~22% of its original value). The guy who owned it before me serviced it every 5000km and looks to have always carried out work on it when needed, and it's in great condition. I expect it'll probably last at least another 100,000km with more or less routine maintenance (minus one or two unexpected problems here and there).

    • forever saving on 06/02/2014 - 08:45

      If I could get a bargain like that I don't mind an old car. I think I'd have to search a while for that since you can't expect every old car to be meticulously maintained throughout its life. That's why I was after a general rule of what price/kms to look for.

  • mini2 on 06/02/2014 - 13:27
    +2

    The way I see it is you either pay for it through depreciation or buy an oldie then pay for it in repair cost. Aim for cars that are popular with people novated leasing them and get one before they're just about to get out of the 3 years lease (yeah I know some people lease them for longer but meh). Either it will still be within warranty or just about to run out but still have the option to extend it and quite a few cars with capped price servicing for 5 years so your costs are somewhat under control. They're still reasonably new so you could lease it if you're that way inclined and yes YMMV.

    Find cars with notoriously bad resale value. They aren't necessarily bad cars, there's just something unfashionable about them. Like a Skoda Superb. Or Octavia (just not the vRS, there's enough fanbois for them to prop the price up). Their VW equivalent is still worth a fair chunk but these unloved Czech distant cousins are worth zilch.

    Also find cars that you can easily order parts from overseas. It will come in handy if you're good at deciphering the manufacturer's parts system. The one for BMW is free online, there's one for Subaru but half the time the parts it illustrated aren't 100% match for Australian cars (got caught out a couple of times) and the Mercedes one is $10 USD a year which represents good value though you will need an US based credit card. Still haven't been able to find a reliable (and free) for VW group…there were some Russian ones but they seemed to have AWOL.

    • maybeamacy on 07/02/2014 - 02:38

      I've read that you should only buy a VAG car in warranty though?

      • mini2 on 07/02/2014 - 08:52

        If that's the case then how do you explain why are 6-8 years old Golf's still worth around 40% of their purchase price? Clearly those are wayyyyy past their warranty period and if something tragic like a mechatronic replacement (or gawd forbids, a complete DSG box) that's a huge portion of the car's value?

        Some prefers a black and white warranty on a piece of paper while others have no issues arguing with VAG re something similar to this:
        http://www.accc.gov.au/consumers/consumer-rights-guarantees/…

        Sometimes you will win while other times (in particular if the VAG in question haven't been seen by a stealership before or for a long time) they will simply tell you to get stuffed. I've tried to get a goodwill claim done, VAG told me GTFO simply they haven't seen the car for years even though it's been over-serviced by an accredited mechanic using genuine VW parts. Back then, the labour rate differences between stealers and specialist workshop were substantial but these days, 20% at most? Lessons learnt, I'd be heading back to the stealership should I be stupid enough to buy another VAG product but try find one that will use parts supplied by me.

        • maybeamacy on 07/02/2014 - 11:45

          They have a pretty large fan base but I read on whirlpool they're not very reliable? I looked up their facebook comments and it's not inspiring to say the least: https://www.facebook.com/VolkswagenAustralia?fref=ts&filter=…

          I guess it all comes down to luck in the end.

        • mini2 on 07/02/2014 - 15:12

          To be fair, like all things internet, people only seem to post crap on teh interweb when something breaks so there's gotta be (somewhat) an over-representation on the issues presented. Heck, my VW's specialist loan car is a 240k Golf with a DSG box and it shifts better than my 130k one. Or my workmate's one with only 60k and it shifts way worse than mine.

  • Ughhh on 07/02/2014 - 11:58

    Just wondering, wouldn't new cars be worth it if you're planning to use/own that car for a long long time, maybe 20 years or till the car is a limpy dinosaur.

    • _Bruce_ on 09/02/2014 - 12:08

      No. Still paying too much in the first place, and how can you be sure a new car will be reliable in the long term?

      • Ughhh on 09/02/2014 - 12:17

        True, but that goes with old cars too, but less likely with new cars.
        With the new car, being the first owner, I know none of the drivers do stupid silly things with the car and is serviced regularly.
        Plus, how do you know no one shat in the drivers seat of your (second hand) car (by first owners)?

        • mini2 on 09/02/2014 - 14:26

          I think you've been watching a little too much Top Gear…there's an episode with them buying used cars then tested for excrement, urine and sperm. LOL.

        • Ughhh on 09/02/2014 - 14:44

          Actually I dont watch Top Gear, or any car related TV show, car magazine or follow any car forums!

          I know the last car my family had that we traded in not long ago, my dog crapped in the back seat. Obviously the dealership doesnt know.

    • mini2 on 09/02/2014 - 14:29

      Depends on the car and depends on you as well. Sometimes life gets in the way of these frugal ways of living.

      What if you're mid 20's, single but then all of a sudden you've become married with kids and the missus want a SUV? Probably safer to get something that's been depreciated a bit so your inevitable change of vehicle won't cost as much as if you've got a brand newie to begin with.

      Or purchase something like that to begin with if you anticipate that will happen in the next 5-10 years. Just an example.

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