Depreciation: The silent killer

November 30, 2007 - By John LeBlanc

In an attempt to narrow the price difference that’s led to a record number of Canadians buying new cars In the U.S., many car makers are offering unheard-of low financing rates and thousands of dollars in rebates on new vehicles.

As a smart car buyer, you’ve already run the numbers on what it costs to fuel, finance and insure that new set of wheels you’ve had your eye on.

But did you know that for the first five years of new-car ownership, your biggest single expense is depreciation?

How well a new car holds its value in the long term is an important question to ask your dealer when making your decision. The difference between a car that holds its value well and one that doesn’t can mean thousands of dollars out of your pocket.

Recently, Kelley Blue Book, an American-based provider of new and used vehicle information, announced which 2008 models retain the greatest amount of their original retail prices, and which decline fastest. (The data is based on U.S. market conditions, but can be used as a general guide for Canadians.)

This year’s top cars that will hold onto their value are: the Chevrolet Corvette, Honda Civic, Toyota Corolla, Infiniti G37, Volkswagen Eos, Mini Cooper, and VW Jetta and Rabbit.

Kelley’s cited VW vehicles as the best brand overall, holding 48.1 per cent of their resale value after five years of ownership.

(A brand must have at least four nameplates in its portfolio, a factor that eliminated high-ranking brand performers like BMW’s Mini, which carried a 50 per cent five-year residual.)

The second leading brand this year is Kelley’s winner from 2006, BMW.

And last place? That went to Suzuki, at 27.6 per cent, followed closely by Kia at 30.4.

And why Volkswagen?

Content, design, pricing and German engineering make for a winning combination when it comes to resale value, said Jack R. Nerad, executive editorial director and executive market analyst for Kelley.

Over five years, the difference in depreciation can more than make up for any purchase cash incentives or cheap finance rates.

For example, over 60 months, a $25,000 Volkswagen would require almost $85 less per month to be leased than a similarly priced Suzuki.

Even if you buy with cash, theoretically, you'll get $5,100 less with the Suzuki when it’s time to trade-in or sell.

Nerad said many of the vehicles with the lowest residual values have been on the market for a while, are produced in high volumes and easily found in the rental or fleet markets.

Minivans seem to be 2008’s big losers.

The Chevrolet Uplander, Chrysler Sebring, Dodge Caravan, Ford Crown Victoria, Ford Freestar (if you can find any), Kia Sedona, and Lincoln Town Car were the 2008 models projected by Kelley to lose their value the most.

“These vehicles often end up being heavily discounted at the dealership or sold into fleets. That, in turn, sends their value as used vehicles plummeting, since there was only weak demand for them as new vehicles,” said Nerad.

Given the current green wheels movement, surprisingly, Kelley is forecasting high-performance cars will have slower depreciation than gasoline-electric hybrids.

This year, the 2008 Chevrolet Corvette Z06 took the top prize for having the highest projected residual value in Kelley’s high-performance category at 52 per cent.

Additional high-performance vehicles that are expected to retain a substantial amount of their original value include the Subaru Impreza WRX STi and the Audi S4.

Among the models losing ground in resale value year-over-year are several hybrids, including the Lexus GS450h, Lexus RX 400h and Toyota Camry Hybrid.

“There continues to be strong interest in new and used hybrid vehicles,” Nerad said. “But as more hybrid models come into the marketplace and more hybrids are available as used vehicles, we expect the market to soften some.”

If you can live without the new-car smell, used still may be the way to go.

The back side of dropping new car prices means lower prices in the used car market. Further more, analysts are expecting a record 550,000 lease returns will flood the Canadian market next year.

Maybe your best bet is to hang on for five more years and pickup a used Ford Freestar, dirt-cheap.

- John LeBlanc, Publisher