Anyone have a good method for calculating depreciation?

[Tag12]

Pretty much as it sounds - seemingly straightforward given that there aren't a huge number of variables, but I've tried a few online ones and they give very odd (and inaccurate) results.

I can think of the following as main factors affecting depreciation:
- Age
- Mileage
- Colour

There are no doubt a few more.

Presumably car brands will calculate this when they create finance quotes? How do they do it?

[Captain Muppet]

I use this formula:

Price I bought it for - price I sold it for = depreciation.

It's rubbish for predictions though.

[MG-FIDO]

There are going to be massive amounts of variables- Manufacturer and model, public perception, what Clarkson said, wheel choice, interior colours, optional extras, whether a new model is going to replace it any time soon, rarity, mileage to name but a few!

[MG-FIDO]

Captain Muppet said:

I use this formula:

Price I bought it for - price I sold it for = depreciation.

It's rubbish for predictions though.

Haha, almost put that myself. I think it's the only way of accurately establishing depreciation, retrospectively!

[deltashad]

Also
Specifications, country of origin.

Another factor which is often overlooked is if the car is about to be replaced by a newer model. My mum usually makes this mistake. The slight discount on an outgoing model can be a false economy. Luckily this time she waited for the new 3 series to be launched before purchasing.

[Si_man306]

[McSam]

I tried to come up with one, for new models from just one (mainstream) manufacturer, and even that was so difficult to make anything but horribly inaccurate. The biggest thing is that the condition and treatment of the car matters just as much as its specification, and both matter less than unpredictable market forces and competitor cars.

You only have to look at the guaranteed minimum values finance companies give for the end of hire purchase periods - they have a big interest in making sure they're right, but they're very rarely close.

[Devil2575]

A crystal ball?

There are so many factors that you couldn't even begin to calculate.

Lots of thing influence the value of a car, many pof which have nothing to do witthe car itself, such as price of fuel, new competing models comming out, future car taxation decisions etc etc.

[Monkeylegend]

What Car mag used to give % residual values after 3 years, not sure if they still do, but that is probablly as good a guide as any. Other than that do your own research and look at used car prices

[Doofus]

Predicting depreciation is relatively easy:

1. What did your car cost you?
2. Take away the number you first thought of.

If you intend to sell the car before its value get to zero, then:

1. What did your car cost you?
2. Take away a bit less than the number you first thought of.

[Tag12]

I had a look at the What Car model, and it would be interesting to see how they did it, but I tried a few examples and they were quite far out (often by >£10k).

Models clearly do exist, although they are just that - models, predictors, not accurate.

Cheers for all of the other suggestions around factors to consider too.

[dingocooke]

Its impossible; even the lease and PCP people get it wrong regularly.

The only thing you can do, is look at the nearest thing to what you are buying that is for sale, but is X years older (X being the time you expect to keep it)
Use that as a guide.

Or, if its a rgeular non specialist type of car, assume it will be a shed type motor at 15 years old, and scale it down to shed money by taking 30% off in year one, and then spreading the balance evenly.

Or just dont bother; because whatever you buy will lose money, unless its a classic car, or you drop lucky with something that becomes a cult!

[oyster]

Tag12 said:

Pretty much as it sounds - seemingly straightforward given that there aren't a huge number of variables, but I've tried a few online ones and they give very odd (and inaccurate) results.

I can think of the following as main factors affecting depreciation:
- Age
- Mileage
- Colour

There are no doubt a few more.

Presumably car brands will calculate this when they create finance quotes? How do they do it?

OP are you calculating depreciation from new or from used?

I work on the assumption that cars devalue by approx 10%-15% per year, after an initial fall of perhaps 25% in year 1.

[Tag12]

oyster said:

OP are you calculating depreciation from new or from used?

I work on the assumption that cars devalue by approx 10%-15% per year, after an initial fall of perhaps 25% in year 1.

That's a good point, first year depreciation will be greater (the shedding of notes as you drive off the forecourt).

I'm basically wondering whether I can create a model that with a semblance of accuracy predicts depreciation (i.e model future car values).

Initially I've used relatively basic spec Audi A3 or A5 dealer prices, that are up for sale 2-3 years after purchase so there are a few years worth of data to use.

The number of variables though does make it tricky.

[excel monkey]

oyster said:

I work on the assumption that cars devalue by approx 10%-15% per year, after an initial fall of perhaps 25% in year 1.

I think that's the kind of rough estimate formula the OP was looking for, and those percentage figures look about right to me. If a car retains half of its new value after three years, it's doing pretty well.

Rare/Premium/fashionable cars might beat these figures. Oversupplied/French/Italian cars probably won't.

Tag12 said:

Initially I've used relatively basic spec Audi A3 or A5 dealer prices, that are up for sale 2-3 years after purchase

Bear in mind those dealer prices will include a 15-20% markup over what the dealer paid the owners of those cars when they traded them in.

Also, the advertised price may not equal the transaction price as most people manage to negotiate a small amount of discount, but this will be hard for you to quantify.

Edited by excel monkey on Wednesday 27th March 13:20

[300bhp/ton]

Tag12 said:

That's a good point, first year depreciation will be greater (the shedding of notes as you drive off the forecourt).

I'm basically wondering whether I can create a model that with a semblance of accuracy predicts depreciation (i.e model future car values).

Initially I've used relatively basic spec Audi A3 or A5 dealer prices, that are up for sale 2-3 years after purchase so there are a few years worth of data to use.

The number of variables though does make it tricky.

Thing is there are simply loads of variables and that's why it's difficult to predict.

Make and model are obvious points you are missing, as is new or used purchase and if used what exact price was paid for it.

Also things like how new is the model, e.g. a car that is just about to be replaced may lose more money than a brand new model would.

Is there high demand and limited supply? This can push prices up in the 1st year for certain exceptions. For example I suspect when the new Corvette goes on sale it'll sell above MSRP for several months, which means used ones might cost as much or more than the MSRP of new ones.

Market sector is also a big factor, e.g. a Morgan will hold it's money far better than a BMW 3 Series will, even if priced similar when new.

Then there are other factors like fuel costs, VED or negative/positive marketing or media image and claims.

[excel monkey]

OP, presume you have already looked at what CAP do?

http://www.cap.co.uk/our-expertise/automotive-fina...

While there are lots of variables, there are depreciation models out there that estimate depreciation. If a manufacturer launches a new car, it needs to project the 3 year depreciation accurately in order to offer competitive PCP deals.

CAP are the main authority on this, and I would imagine they work closely with manufacturers when a new car (or a whole new brand like Dacia) is launched, to project future values.

[Tag12]

excel monkey said:

OP, presume you have already looked at what CAP do?

http://www.cap.co.uk/our-expertise/automotive-fina...

Thanks, I hadn't seen that - they don't put any info on how they do it, but somehow that isn't surprising as it's their IP! They touch on another interesting topic, the value being wiped off UK vehicles (vehicle parc) each year. That would be fun to calculate.

I just wanted to have a go at creating an Excel model for depreciation, but I think unless you omit certain factors (which I'm sure people like CAP do) it's not possible. Equally, you'd need a lot of data to start testing whether you had got the modelling right.

In simple terms, you could just locate the make and model on Autotrader/Pistonheads Classified and then find one at a year old, 2 years old, 3 etc etc, and map the change. Consistent subsequent annual mileage would then see similar depreciation (based on all other things remaining the same, i.e. no new models brought out, no damage etc).

[Wacky Racer]

MG-FIDO said:

There are going to be massive amounts of variables- Manufacturer and model, public perception, what Clarkson said, wheel choice, interior colours, optional extras, whether a new model is going to replace it any time soon, rarity, mileage to name but a few!

Why anyone ever takes any notice of that buffoon is beyond me......

I reckon as a rough rule of thumb the "average" car drops 50% of list price in three years, but of course there are loads of variables.....

[Doofus]

It's also worth pointing out that most used car price guides are inaccurate too, which means nobody is getting the depreciation thing right.