Depreciation: The cars that shed their value very, very quickly

New cars are cheap in real terms, and the second-hand market is feeling the squeeze. James Ruppert explains why, and offers some tips

Students today eh? Doctorates in David Beckham studies, BAs in Abba lyrics and Hollyoaks HNDs hardly seem to stretch their young minds. Imagine my delight, then, when I was contacted by a final-year student at Lancaster University writing her dissertation on the decline of used-vehicle residual values in the UK.

Well that's my specialist subject - and what's more, she is using the Pestel analysis system, which means the political, economic, socio-cultural, technological, environmental and legal factors are all taken into account. This is a serious economic issue that has a huge impact on all of us who run cars. In real terms used cars have never been cheaper, the choice has never been greater and the opportunity to buy better cars has, well, never been better. So what's happened?

CARS LOOK OLDER, FASTER.

Just as coppers look ever younger as you get older, so used cars seem to go from showroom fresh to becoming bangers in only a few short years. One of the major reasons for this is the adoption of a twice-yearly registration plate change. This was instigated to stifle the August boom in new car sales and spread business more evenly throughout the year.

Moving from the understandable alphabetical prefix to a mix of regional and half-yearly digit and letter identifiers has just confused everyone. And most significantly it gives more opportunities to down-value a car. For instance, a 2001 car can be on an X plate, a Y plate or a 51 plate, with several hundred pounds difference for what is ultimately an identical car. The overall effect is that cars become worth less, faster.

CARS ARE DESIGNED TO LOOK OLDER, FASTER.

Never mind a constantly changing registration plate; the car itself is likely to be constantly evolving, too. Model life-cycles used to be measured in decades, but now, after just a few years a model is either freshened up or completely replaced.

The Japanese have always felt the need to constantly keep ahead of consumer expectations. Take the Toyota Corolla, which is one of the longest running brand-names. In the UK market a new, ugly model was introduced in 1997. It was then substantially revised inside and out in 2000 to make it less ugly.

Then there were new engines before the model was totally revamped for introduction at the end of 2001. By 2004 the Corolla was due for a mid-life facelift which happened in June of that year. All those different incarnations need to be priced differently, which pushes values down.

THERE ARE MORE MODELS THAN EVER BEFORE.

Once upon a time manufacturers offered a small, a medium and a large car. Some of them had higher specifications and were called GLS or Super Deluxes, Not any more. There are lots of niche models like people-carriers, off-roaders and city cars, which all come in a confusing number of specifications. So it has become more important than ever to buy the "right" model.

Wrong specifications are punished at resale time so that a 4x4 without a diesel engine and an executive car minus an automatic gearbox will be worth considerably less. Someone considering a family car has a choice between a people-carrier, a compact people-carrier, a hatchback, a saloon, an estate and an off-roader.

There are no simple choices anymore so to attract buyers, prices have to be softer. Even the prestige marques have become mass-market ones as they need to sell more. Whereas BMWs and Mercedes were once exclusive and almost immune from depreciation, they now fall in value like every other car.

NEW CARS ARE CHEAPER

Even though there has been evidence that car prices have been on the rise, overall, new-car prices have fallen and specification increased. A Peugeot 607 saloon, never the most popular of purchases, cost £23,590 in 2000 and had been reduced to £21,590 by 2005. This was partly due to the "rip-off Britain campaign", when the Consumers Association showed that identical cars could be bought more cheaply in Europe.

Another factor has been the ending of the motor industry's exemption from EU competition rules. Car supermarkets thus became more of a force by offering imported cars initially at non- negotiable prices, plus a new breed of car brokers would negotiate on the buyers' behalf direct with the dealers.

With more discounts and special offers, and Citroën's aggressive approach, resale prices have to fall as the retail price can be thousands less than the official one.

NEW CARS ARE MORE ATTRACTIVE

If you have to borrow to buy, interest rates have been at an all-time low. We are also much more obsessive car consumers and must have the latest model. Advertising pushing the latest, safest model means our ownership cycles are shorter. Most buyers would rather have a car under warranty so feel more inclined to sell after three years. More used cars in circulation means prices will fall. As the num-ber of three- or four-year-old cars rises, then the value of older models will fall even further.