Buying used makes cents

Mark Toljagic

SPECIAL TO THE STAR

Think you were unjustly punished for holding onto that telecom stock over the last few years? Imagine making a $30,000 investment and losing $5,000 before you’ve even left the office.

For the 1.3 million Canadians who buy a new car or truck in a given year (fleet sales excluded), this is exactly what happens.

Never mind letting the door smack you on the way out, it’s the depreciation hit that really hurts.

Like it or not, you could not turn around and sell your brand-new car without eating a significant loss. Kia or Toyota, they all lose value the moment you take ownership. That’s the primary reason a new car costs so much to operate in its first year.

According to DesRosiers Automotive Consultants, the cost of operating a $25,000 compact car is 41.6 cents per kilometre in the first year, but drops steeply to 27.4 cents and 25.5 cents in the second and third years, respectively.

The decline is largely due to that big depreciation hit during the first moments of ownership.

So where is the smart money going?

There’s an enormous market for used vehicles, which traditionally outnumbers new-car sales by almost two-to-one in Canada. While some people shop used out of necessity, others elect to buy used, knowing that a previously owned vehicle can still provide all the functionality of a new car but without the punitive high costs.

In 2003, there was an oversupply of used vehicles in Canada because exports to the U.S. collapsed. Compared to the record high of 211,800 vehicles that went south in 2002, Canada exported only 96,600 last year, largely due to the strengthening Canuck buck.

Since 1994, when the last of the tariffs on used vehicles was phased out under NAFTA, Americans have taken a shine to Canadian used vehicles. The 65-cent dollar of the past few years has allowed hundreds of thousands of cars and trucks to be siphoned out of the Canadian market (Dennis DesRosiers, head of the auto industry research firm, says they took the very best models), artificially boosting used-vehicle prices here.

But with American dealers experiencing a glut of used vehicles recently, and the dollar gaining strength, the conga line of auto carriers out of Canada slowed, leaving thousands more cars and trucks to linger on lots here. With a substantial increase in the supply, there’s been a happy effect on windshield prices.

“Prices are falling – two to three per cent – and that’s significant in the used-car market,” advises DesRosiers. Thanks to these favourable conditions, he says upwards of 100,000 consumers migrated to the used-vehicle market last year, rather than purchased new.

“Interestingly, the new and used vehicle market appear to be counter-cyclical,” says DesRosiers, explaining that when one market is shrinking, the other grows by a corresponding amount.

So the auto industry has taken to hedging its bet: “auto remarketing” is a huge growth area for manufacturers and new-car dealers.

Why? Because the profit derived from the average new-car sale is typically less than $1,000 to the dealer while a used-car sale can generate $1,500 to $2,500 or more.

In fact, new car dealers have become a major force in used-car sales: 10 years ago, dealers sold about a third of all used cars; now it’s 44 per cent. Conversely, in 1993, half of used cars were sold by their owners privately; that’s been reduced to 38 per cent today.

Dealers are rapidly gaining an advantage. A lot of new cars are leased and returned to the dealer after two or three years. This has provided dealers with a large and predictable supply of late-model vehicles to remarket.

It doesn’t hurt that automobile build quality has risen steadily over the years.

Back in the 1970s, the average car racked up 160,000 km before it got dropped off at the junkyard. In the 1990s, the average car reached 240,000 before it got “recycled.” New 2004 models are expected to see 300,000 km before they’re retired.

There’s lots of residual life left in today’s vehicles, making them more attractive for resale.

But what about that old carp: “Why buy somebody else’s problem?”

One CAA ownership survey revealed less than 10 per cent of owners of cars five years old or younger got rid of them because of reliability problems or high maintenance costs.

Far more common reasons for selling a car five years old or younger: 43 per cent got rid of them because their lease expired, 30 per cent just wanted a change, and 21 per cent said the vehicle no longer met their requirements.

Only 22 per cent of owners of vehicles six to 10 years old got rid of them due to reliability problems.

It means you can shop with confidence. Used vehicles are better products today than they were 25 years ago.

Still, the number-one issue for used-vehicle shoppers today is reliability. Because you’re likely buying without the benefit of a bumper-to-bumper warranty, you have to be mindful.

As a general rule, you can’t go wrong with a Japanese-brand vehicle.

Japanese automakers – specifically Toyota, Honda and Nissan – have dominated the CAA Pyramid Awards for years. The awards are based on satisfaction reports from thousands of owners of vehicles up to 12 years old and even older.

Similarly, the five top-rated brands in J.D. Power’s Vehicle Dependability Index study are all Japanese. The 2002 study – which surveyed 30,000 original owners of 1998 models about their experiences – ranked Lexus with the fewest problems after four years of ownership, followed by Infiniti, Acura, Honda and Toyota.

Some manufacturers tend to ignore this longevity data – mainly because the mainstream brands like Dodge and Chevrolet have ranked below the industry average – but make big noises about J.D. Power’s Initial Quality survey, which is of little relevance to used-car shoppers.

European brands hardly fare better. Despite their astronomical price tags, which provide a perception of quality, these cars often make poor used-car buys. Parts and service are dear – one wry observation suggests North Americans are helping to pay for Europe’s cradle-to-grave social costs.

There are some good domestic products out there, but not in small cars. Their specialty is big iron. Virtually everything that came out of Oshawa is pretty good: Chevrolet’s Lumina and Impala, the Buick Century and GM’s full-size trucks.

Ford’s F-Series trucks, Crown Victoria and big Lincolns are good; the Windstar is middling. DaimlerChrysler still has some way to go to catch the quality leaders. (These assessments are based on thousands of comments we’ve received for our Second-Hand columns.)

With new-car dealers muscling in on the used-vehicle market with promises of fat profit margins, the private sale is rapidly becoming an anachronism. Too bad, some of the very best deals – and vehicles – may still be found on a driveway if you look hard enough.

There are also some appealing buys on independent used-car lots – despite the beating this downtrodden industry’s image has gotten over the years.

The key to a good used-car purchase is patience. Take the time to find exactly the right vehicle you want, have it inspected by a technician, and satisfy yourself that it is all it is supposed to be (get the Buyer’s Information Package, even for a car on a lot).

The search is time well spent. Because while you’ve sacrificed the chance to enjoy that new-car smell, you’ve managed to save thousands of dollars.

Money you could parlay into bigger, more spectacular losses on the stock market.

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