If you’ve ever owned a car then you know that it’s basically impossible to sell a car for more than you bought it for, at least if you’ve owned it for any length of time and aren’t just buying and selling constantly. But why is that? Why do cars lose value, and why does it often happen so drastically. In this article we’re going to find out.
Defining Terms
In financial language, when an “asset” loses value over time this is what’s called Depreciation and it’s the opposite of appreciation, when an asset gains value over time. Almost anything in the world can be put into one of these two categories. Houses are an appreciating asset because they gain value over time, whereas a carton of milk is a depreciating asset because used milk doesn’t have as much value as new milk.
Physical Depreciation
There are two reasons that depreciation happens, one makes logical sense and the other is a complicated problem created by finances. Let’s start with the easy one first. Cars depreciate in value over time because over time the car physically degrades. Rust builds up, engines get less efficient, parts break and need replacing, cars are not permanent they require constant upkeep, and so it goes to follow that the older the car is, the more expensive it is to maintain and the less valuable the car is to compensate.
Similar to our milk example then, though over a much larger time frame. However you may also be rightly thinking that houses also degrade over time as well. So why is it that they are an appreciating asset instead of a depreciating one?
Financial Depreciation
The answer is finance, and the issue with anything financial is that it often isn’t logical. Here’s what you need to understand, financial value is not actually tied to the quality of the thing, monetary value isn’t a scientific measurement like “top speed” or “weight in Kilograms”. Value is purely assigned to an object based on what you can sell the car for.
The reason that cars depreciate in value over time is only partly to do with their physical degradation, it’s mostly to do with people’s fear of physical degradation. Cars physically degrade much much slower than they financially depreciate. Most depreciation happens in the first 2 years of a car’s life when it’s actually at its best condition.
But people don’t want to drive a “used car” and it’s that label that drives the price down much more than anything physical. Houses on the other hand have no such stigma surrounding them, worrying about buying a “used house” is not a thing.