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CarSwitch: What drives resale value of used cars?

We’ve all heard cars depreciate, a lot! Particularly in the UAE, where the average lifespan of used cars is quite short (almost 4-5 year shorter than other markets). It can be quite a distressful thought if you’re selling car, particularly in a tough market as was observed in 2018 where the first half suggested new car sales declines of 20-25% YoY. These revelations can be quite daunting as you consider the financial loss you may face versus the initial car price. So why do cars depreciate? How quickly does it happen? Do some makes or models do better than others? CarSwitch have scoured through thousands of car transactions, across their platform over the last 3 years, to answer many of these questions

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– Cars depreciate, and that’s only fair. Though mechanical and in more recent years electrical marvels, used cars ultimately that takes its toll on resale value of any car. CarSwitch analysis of used car sale transactions suggests used cars in the UAE lose 15-20% of their value every year. Ironically, the depreciation is highest (20-30%) in the very first year even though wear & tear is likely limited in its early months of use. The rationale behind this is even if a car is barely driven, it is still a “used car” as soon as its driven off the dealer’s lot and loses at least 10-15% of its value. This essentially marks the shift from its retail price (what a dealer sells the car for) to its wholesale price (what the dealer, or others, are willing to buy the car back for)

– The lower the maintenance costs the better the resale value is a fair conclusion, and data backs it. CarSwitch has consistently found that Japanese makes, renowned for lower maintenance costs, maintain better resale value. More popular models of Nissan, Toyota and Honda generally have lower depreciation rates than American or European makes (40% versus 50% depreciation after the second year). One factor that can help protect your resale value is a service contract, as it covers the maintenance costs that prospective buyers may be fearing. When buying a new car in the UAE, keep an eye out for the frequent promotions where new cars are sold with several years of free service!

– Rarer cars have better resale value. It’s not surprising that CarSwitch found some rare iconic cars become collector items, and can even appreciate in value over time. As one extreme example, a 1954 Mercedes W196 Formula 1 car was sold for Euro 25m almost 60 years later (in 2013). More relevant to every day consumers, more subtle definitions of “rare” can support better resale value. We have found on average coupes, which are generally less common, retain better value than sedans (60% vs. 50% after 2 years). Do be mindful though, even though these “rarer” cars may retain better value they can take longer to sell

– Basic cars retain better value. Used car models with only the basic set of features retain value better than their counterpart models that come with all the bells and whistles. When new, a consumer would pay 10-30% more if they chose the car model with all the options versus the basic version. However, after 4-5 years we observed that the price difference between the two models is closer to 5% indicating a greater loss in absolute value of the more premium cars. This is particularly true for customized cars that might not fit everyone’s taste (think yellow seat belts).

– Condition matters, but generally only a +/- 5% impact on value. The condition of the car certainly affects its resale value. We have observed a 5% difference in value between a car in great condition and one in worse condition. Most common condition related issues behind this 5% decline are repainted panels indicating accident history, and body parts wear & tear. Of course cars with rather serious mechanical issues see a much larger drop in value (of the 5,000 cars inspected by last year, only 5% of cars displayed serious mechanical issues)

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The data behind these insights has been aggregated into a free online used car valuation engine you can visit to check the value of your car, or the next used car you plan to buy. It’s particularly helpful to determine how well, or poorly, cars you are considering retain value. Some of those insights are synthesized in this piece on used cars that retain the best value, and you can draw individual model comparisons on the valuation engine