FOOL'S EYE VIEW
New Car Prices Fall 13%

By Stuart Watson (TMFTiger)
July 31, 2002

We've been bombarded with regular updates of house price indices from the likes of the Halifax and the Nationwide in the last few years. But did you know there was a car price index as well? It's published by the Alliance & Leicester in conjunction with What Car? magazine. As it happens the index has just celebrated its third birthday.

In the last three years the average price of a new car has fallen by 13%. Over the same time period, they point out, property has increased by 50% whilst the price of foreign holidays has gone up by 26%. 'Nearly new' cars have fallen even further. They've dropped 16%, whilst the average price of three-year old cars has plummeted by 21%. In real terms, prices have fallen even more. Thanks to increases in average wages new cars are 26% more affordable than they were three years ago with the average new car now setting you back £10,445.

The biggest price falls have been seen in the City (eg Ford Ka), Small (eg Ford Focus) and MPV (eg Freelander) categories. Superminis (eg Ford Fiesta), Compact Executive (eg BMW 3 series) and Luxury (eg Mercedes S class) categories have fallen the least. Further price drops could be on the way too. Douglas McWilliams of the Centre for Economics and Business Research says "it is unlikely that the price reductions will stop here: with the retail and car markets appearing less buoyant, there is now further downward pressure on car prices".

A good time to buy?

Fantastic, you might think, I'll go out and buy a new car! But hang on a sec. Just because something is cheaper does not necessarily make it good value. It could be that it's just slightly less expensive than it was before.

Although new car prices are cheaper, the price of the banger you'll most likely be selling to partly finance it has fallen a lot too. The extra amount you have to stump up to upgrade from a three-year old car to a new one may not be that different from what it was back in 1999. It's a similar logic that applies to someone hoping to move up the property ladder. If they've got a property already they should actually dislike house price increases as it just increases the gap between their current property and the one they want to buy next.

In fact, if you bought a new car three years ago and you're looking to sell it now you've really been hit. Not only are the first three years the heaviest in terms of depreciation, but the 21% fall in used car prices has compounded your loss further still. According to a recent press release from Glass's, the average mass production car, doing 12,000 miles a year, loses almost 60% of its value in its first three years.

A simple example may illustrate the frightening maths a little better. Say you buy that average new car for £10,500 and take out a three-year loan at 11.9% to finance it. At the end of the three years you've paid over £12,500 in loan instalments (assuming you didn't get stung for payment protection insurance as well), but you'll have a car worth just £4,200. That car has cost you £8,300 over three years even before you count insurance, servicing, petrol and amusing bumper stickers.

Buying a new or newish car remains a fabulous way to waste your money. If you're strapped for cash, along with remortgaging, trading down to a cheaper car is one of the best ways to ease the strain. Do you really want to keep up with the Jones's? But don't forget that switching cars on a regular basis can be very costly too. Dealers have to make a profit so, unless you buy and sell privately, you'll end up spending even more if you have a weakness for changing your wheels frequently.

Bah, Humbug!

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