Why Do Luxury Cars Depreciate So Fast?

It’s no small secret that luxury cars depreciate faster than “normal” cars.

While every car depreciates (or at least that has historically been the case – the supply constraints imposed by Covid, along with additional liquidity being pumped into global economies, have resulted in some cars like the Honda Civic Type R holding their value incredibly well, or even increasing in value) luxury cars depreciate the fastest of all.

A Honda Civic will generally depreciate slower than a Volkswagen Touareg, for example.

Here is a list of some of the top-depreciating cars, according to a 2020 study by iSeeCars:

Notice some common themes? The list full of luxury, European models (along with the Nissan Leaf – if you’ve read our Nissan Leaf buyer’s guide, you’ll know that electric vehicles have a tendency to depreciate rather quickly).

Steep depreciation is one of the reasons why you can often pick up older, used luxury cars for cents on the dollar (compared to the original purchase price) years later.

But why do luxury cars depreciate so fast?

In this edition of Car Facts we are going to explore some of the reasons why luxury cars lose value so quickly.

Here are some of the top reasons for luxury car depreciation. Please note that there are definitely more reasons than this for higher-than-average depreciation rates on luxury cars; these are just some of the key reasons.

Luxury Cars Are More Expensive To Begin With – You Pay A Premium For Luxury That Isn’t Worth The Extra To Many

The first reason why luxury cars depreciate faster than normal cars is due to the fact that they are more expensive to begin with – and a lot of this additional expense is due to the “intangibles” that come with luxury vehicles (i.e. the prestige associated with owning a car from a brand like BMW, Audi or Mercedes-Benz).

For the vast majority of car buyers, the extra features and performance of a new luxury car isn’t worth the price difference over a basic car. For example, to much of the car buying population (and this may come as a surprise to petrol-heads) a new BMW 5 series is probably not worth twice as much as a Toyota Camry. For all intents and purposes, the Camry does just as good of a job at being a daily driver – the extra performance and badge prestige is something that is very much in the eye of the beholder. In fact, many regular car buyers would rather the Toyota over the BMW, as the Toyota has a great reputation for reliability.

While the new buyer might see real value in the intangibles that come with buying a new luxury, there is quite a gulf between these buyers and those who purchase second hand – this places downwards pressure on prices.

You’ve heard the saying “the bigger they are, the harder they fall”, right? Well this applies to luxury car prices as well, especially luxury sedans.

The Typical First Owner Likes New Cars

Herein lies the “paradox” of luxury car depreciation:

Nobody who can afford to buy a new luxury car wants to buy a secondhand one – and nobody who wants to buy a secondhand luxury car can afford a new one (ok there might be some exceptions to the rule, but hopefully you can see what we mean).

Those who can afford to buy new luxury cars, funnily enough, like to own new luxury cars. Therefore, they tend to trade their “near new” cars in at a faster-than-average rate, meaning that there is often a rather robust supply of late model luxury vehicles on the market. Simple supply and demand economics dictates that prices have to fall to meet demand, and excess supply exacerbates this issue.

If you are the kind of person who places value on driving the latest and greatest cars, then you’ll more likely be the kind of person who frequently trades in their near-new cars in order to be seen at the head of the pack.

Cartelligent has some interesting data on this very topic, in their run-down on car brands that are kept the longest and shortest.

There is an outlier in their data (Volvo – which is a luxury brand – tends to be the car brand that is owned for the longest period of time) but apart from that you can see the longest-held brands dominated by Lexus, Toyota, Subaru and Honda, whereas the shortest-held brands being BMW, Acura, Mercedes-Benz, Audi and Mini – all luxury/premium car brands.

Another related reason why luxury cars often depreciate rapidly is because many of them are leased. New owners will often lease a high-end car – often for cashflow purposes – so that after three years they can turn that vehicle in and get the newest version. This means there is often a glut of used luxury cars around three years old, putting downward pressure on values. On the other hand, many owners of slowly-depreciating cars hold on to their vehicles for a long period of time, meaning that there is less supply in the used market (relative to demand) that helps to keep prices higher. As per that Cartelligent article, luxury cars are frequently leased which means there is lower-than-average duration of ownership, and greater turnover back into the used market.

Reliability & Maintenance Concerns

Another reason why luxury cars depreciate so much faster than normal cars is due to reliability and maintenance concerns.

All cars have the potential to break down and cost lots for repairs – and routine maintenance isn’t cheap at the best of times on most vehicles – but luxury/high-end cars do tend to have much greater repair costs and maintenance requirements.

If you want to see a ‘real world’ example of this, take a look at this article one of our editors wrote on his experience with buying a cheap, used Volkswagen Touareg.

This was a car that was very expensive new, but which can be purchased at a massive discount second-hand.

This cheap, used Touareg has had 50% of its purchase price poured into it for repairs in the 12 months since he purchased it from a second-hand car dealer. Although you might have this kind of bad automotive luck with a used economy car like a Honda Civic or Toyota Corolla, the chances are definitely much lower.

Higher maintenance and operating costs add to the depreciation effect on luxury cars, as used owners can find themselves outside of the factory warranty period and into massive repair bills and substantial maintenance requirements. Even reliable luxury brands like Lexus will often be more expensive to repair (when they go wrong) than non luxury vehicles.

This is one of the reasons why even non-luxury cars from brands with poor reputations for reliability, such as Alfa Romeo or Renault, have a tendency to depreciate so aggressively. The second (and subsequent) owner(s) effectively want big discounts to compensate for the potential maintenance and repair nightmares.

The more cynical among us would argue that luxury car manufacturers build their cars to be the best they can for the first owner who drives the fresh car out of the showroom – and subsequent owners be damned. There does seem to be an element of truth to this argument, although the more likely scenario is that luxury, high-performance vehicles are inherently complex and often at the cutting-edge of technology, and this means there is more to go wrong … and it will be more expensive to fix when it does go wrong.

Recap – Why Do Luxury Cars Lose Value So Quickly?

There are several reasons why luxury cars have a tendency to depreciate faster than more mainstream, affordable cars.

The first reason is that luxury cars are more expensive to begin with. You’re paying an inflated price for prestige and luxury (especially when you consider how good even basic new cars are these days in terms of features). Whether this inflated premium is worth the extra money is down to your perception of value – considering how many people do buy luxury cars brand new, there are clearly plenty of us out there that see the extra cost as being worth it.

Secondly, luxury cars are typically bought new by people who can afford them new (or who want to look like they can afford them new – here’s hoping Dave Ramsey isn’t reading this article). Therefore, “new buyers” of luxury cars have a tendency to trade their cars back in relatively quickly when a new-and-improved model is released, as they want to be driving the latest and greatest. This turnover of near-new luxury cars kickstarts the depreciation process.

Finally, the elephant in the room is the cost of running. Luxury cars typically cost a lot more to run than basic economy cars. This is something we cover in more depth in a recent article about buying a used luxury car versus a similarly-priced new car. Just because your used luxury car has lost 50, 60, or 70% of its value since new, it doesn’t mean the running costs have gone down (in fact the running costs might even be worse once you get out of the warranty period). This is another factor that heavily contributes to steep depreciation on luxury vehicles – used buyers need to be able to buy these cars at a price where they can economically maintain and repair them.

Here at Garage Dreams we aren’t personal finance experts. We aren’t here to tell you if you can or cannot afford a luxury car, or whether one is a suitable purchase for your financial position. However, having benefitted (and suffered) from cheap, heavily-depreciated luxury vehicles on a number of occasions, we feel qualified to discuss the pros and cons of this type of car purchase.

Make sure you consult our growing archive of car buyer’s guides if you are looking to make a used purchase. We have a number of guides in there on luxury/performance car buys, such as the Volkswagen Touareg, Lexus L460, and BMW M3.

We would also love to hear your take on why luxury cars have a tendency to depreciate so fast. Leave a comment below to get the conversation started!

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