Electric car depreciation vs petrol and diesel cars

By: Toby Hagon

Is depreciation on EVs better or worse than petrol or diesel cars? As with any car, it depends on a number of factors.

Believe the social media buzz and electric cars will be all but worthless when you’ve enjoyed a few years of zipping around town.

Shock stories of poor residual values abound and have some questioning whether they want to take the electric plunge.

However, as the market matures and more new EV options hit the road, it may not be all bad news.

So, what’s really going on with the depreciation of EVs and how do they compare with the cars we’ve been driving for decades?

How new car depreciation works

Disregarding rare exceptions, new cars are worth less as soon as you drive them out of the dealership, whether it’s an EV, plug-in hybrid (PHEV) or internal combustion engine (ICE) car.

The older a car gets and the further it has travelled, the less it is usually worth. No matter what car you buy, the biggest hit of depreciation is likely to occur in the first year of ownership.

That’s because anyone prepared to splash out, say, $60,000 on a new car is paying costs typically only associated with new cars, such as dealer delivery, luxury car tax (on vehicles less than two years old) and perhaps an extended warranty.

They may also be paying for items that typically aren’t valued as much or at all in the used market, like dealer options such as a tow bar, bull bar, window tinting, and floor mats. So it can cost a bit extra for that new-car smell.

Many buyers are also likely leasing or financing a car and the circa 5-10 per cent saving by buying a near-new used car will have minimal impact on weekly repayments.

In short, buyers probably aren’t desperate to save a few grand on buying a near-new car when they are dreaming of new. So the best way for people to sell their near-new car is to drop the price further, contributing to that hit of depreciation early in the car’s life.

Redbook is a useful reference for used car values and a scroll through forecast future values reiterates the point.

Buy the Mazda CX-5 Akera Turbo for $55,000 plus on-road costs, for example, and Redbook estimates it will shed 24 per cent of its value - $13,250 - after 12 months and 20,000km.

Over the next year and 20,000km, Redbook predicts it will only drop $3300, or six per cent of its original purchase price.

The Kia Sorento GT-Line diesel is forecast to lose 17 per cent of its original value in the first year but experience depreciation of around half that in the subsequent few years.

There are some exceptions with very popular models: Redbook estimates a Ford Ranger V6 Wildtrak is forecast to only drop 5 per cent of its original price in the first year and the Toyota RAV4 Cruiser 6 per cent. Blame it on the popularity of those models and the healthy demand on the used car market.

Supply and demand

As with the real estate market, the used car market is driven purely by supply and demand.

If a car is desirable and there aren’t many on the market, then prices will likely remain high. If there’s an oversupply and not many people looking to buy, then sellers typically need to lower their asking prices.

Demand for certain types of vehicles can change over time, too. When fuel prices spike, for example, bigger, thirstier cars can be tougher to shift, whereas more fuel-efficient hybrids tend to be in high demand.

Quality and reliability also play into the supply-and-demand formula. Some luxury cars can be prone to faults and expensive to service or repair as they get older, reducing their desirability and in turn impacting residual values.

Conversely, cars with a reputation for reliability and longevity can see buyers prepared to pay more for their older vehicles.

And when Aussies were holed up at home during COVID, prices for used four-wheel drives boomed as more people planned to hit the road instead of jetting off overseas.

What about EVs?

Many are still unsure about EVs, especially the durability of their batteries over time.

As with phones and laptop computers, some early EVs suffered significant battery degradation, whereby the original capacity of the battery dropped over time.

It’s less of an issue with a $1000 phone or $2000 laptop than it is with a $70,000 car. Ultimately resale values on phones and computers aren’t nearly as important – or financially impactful – as they are with a car.

Little wonder some are frightened by the prospect of having to replace an EV’s battery pack.

While replacing an engine can also be costly, replacing a battery can be of concern because many people are less familiar with their signs of ageing. A smaller number of options for how to address a failed battery – as opposed to fixing a failed engine – can also be a source of concern for some consumers.

But, just like an engine, batteries are designed to last the life of the vehicle, with most having at least eight years of manufacturer warranty as a back-up. Further, there are signs that battery degradation on newer EVs is a lot less than some owners of earlier model EVs experienced.

“There isn't substantial degradation that we’re seeing globally,” says Ross Booth, the general manager of valuations giant Redbook.com.au. “Perception is that it might be a problem so therefore that impacts the purchase of used vehicles.”

Booth says transparency around battery health is crucial for giving buyers confidence when shopping for a second-hand EV. “That's what we need to help perception match reality.”

Some early EVs have held up well

As with ICE vehicles, there are some older EVs holding up well on the used car market – and it’s supply and demand again playing out.

A Tesla Model S 70D from 2015 cost $124,677 and Redbook suggests it’s lost as little as 68 per cent of its original price.

That’s still plenty of money, but if you’d splashed out on a Mercedes-Benz E400 or BMW 535d – similarly sized luxury sedans at a similar price – the data suggests you would have lost about 78 per cent of the original price.

A Tesla Model 3 Standard Range Plus from 2019 – when the car first went on sale – is estimated to have lost 65 per cent of its original price, whereas a similarly priced BMW 330i dropped only 45 per cent.

One of the more interesting examples involves two 2018 models from Hyundai. The all-electric Ioniq is estimated to have dropped by just 34 per cent, whereas the petrol-only i30 Elite experienced 44 per cent depreciation.

That said, because the Ioniq was a lot more expensive new - $48,990 versus $28,950 – owners of the EV would have lost more money. Booth says that’s an important point and one that highlights the challenges for EVs.

Which EVs are holding their value best?

The EVs dropping most in value are those in the luxury end of the market, priced well over $100,000.

Some have almost halved in value within four or five years, leaving well-heeled owners a little less well-heeled. To some extent it’s indicative of the luxury market, which often leads to greater depreciation, at least in dollar terms.

As Booth points out, “Depreciation is greater on a luxury vehicle than for a non-luxury vehicle.”

Yet towards the lower end of the market – where there are far more buyers - prices are more resilient. Search for an MG4 online, for example, and the cheapest ones are asking a bit under $30,000 versus a new price of $34,990 drive-away.

Similarly, the cheapest BYD Atto 3s from 2022 are asking around $32,000, which isn’t bad compared with the $39,990 plus on-road costs for the recently introduced Essential model.

Granted, owners may end up selling for less, but presumably not all sellers are that wide of what the market is prepared to pay.

And in the case of the BYD, the new car gets less equipment than the model sold years ago, reinforcing the increased competition – sometimes intra-brand – that’s helping shape the market.

Depreciation on Teslas

Tesla has been reported to have suffered significant brand value in recent months as a result of the political antics of Tesla CEO Elon Musk.

While new Tesla sales have indeed dropped notably worldwide, their value as used vehicles is, to date, a little less clear. Booth says the market for used Teslas is still stronger than the rest of the EV market.

“Everything we’ve seen so far looking at the data is that there has not been a ‘Musk factor’ in the used car market,” he says of the recent Tesla controversy.

“Tesla still performs stronger as far as residual percentage … and (time on market) is still quicker with a Tesla.”

But Tesla is also forecast to underperform compared with similarly priced alternatives.

Buy a Tesla Model 3 Rear-Wheel Drive today and Redbook estimates it will lose 55 per cent of its value (or $30,200) over five years and 80,000km.

A similarly priced BMW 118i – admittedly a smaller car – is forecast to lose 46 per cent of its value and cost its owner $26,500 over the same period.

Incentives make new EVs more appealing

While some government incentives for EVs have dried up, there are still generous ones around, including the fringe benefits tax (FBT) exemption for electric cars priced below the luxury car tax threshold.

Those incentives tend to favour new vehicles. Or, at least, there tend to be better benefits for those buying new, according to Booth.

“Even with the current novated lease, which is the main [incentive], you get a greater benefit for buying a new vehicle than what you do for a used vehicle,” he says.

That’s in part because the leasing companies facilitating the financial arrangement to leverage the fringe benefits tax exemption on EVs often get a fleet discount. Plus they can take the GST off the purchase price, something you can’t do with a used vehicle bought privately.

The COVID influence

Electric cars started gaining in popularity once the COVID shutdowns kicked in.

A shortage of stock across the market and limited EV options meant some cars were selling over the odds. Some manufacturers, too, took the opportunity to increase prices.

The Tesla Model Y is a good example.

The most affordable variant launched in 2022 for $68,900 plus on-road costs but within one week increased to $72,300. By mid-2024 it had dropped to $55,900.

Anyone who paid top dollar was immediately almost $17,000 out of pocket before applying traditional depreciation factors such as age and kilometres. Why buy a second-hand one for, say, $60,000 when you can get a new one for less?

It’s not alone. The Nissan Leaf, MG4, Polestar 2, Ford Mustang Mach-E, BYD Atto 3 and Cupra Born are all significantly cheaper now than they were previously.

Drive for the latest

The relatively rapid introduction of new EV models to the Australian market has generated demand among some buyers to always have the most recent new models.

That’s good for choice, but it can also mean those models can quickly look old.

“EVs don't hold their value as well as ICE because of consumer behaviour… people want the latest and greatest technology,” says Booth. “So if they're going to buy an EV they buy a new one because they want the latest and the greatest.

Booth also says higher prices for EVs can lead to a greater financial loss.

“There’s a price premium for what you pay for a BEV compared with an ICE. And that then translates into the used car market even more … the depreciation percentage is higher because of the value differences.”

ICE vs hybrid vs EV

The first hybrid cars hit Australian roads in 2001. Early examples were expensive compared with petrol-only alternatives. Residual values early on were poor.

But as hybrids became more popular and the price premium over a petrol-only model narrowed, their appeal as used cars began to increase.

Booth says it took time for owners to understand and trust the technology, something that is now proven.

“It took over 20 years for hybrids to get to parity from a depreciation perspective (with ICE) and in actual fact many Toyota hybrids are now worth more than what the equivalent ICE vehicle is,” he says.

But plug-in hybrids – essentially a regular hybrid with a bigger battery and the ability to recharge externally – don’t fare as well, in part because the technology is still evolving.

Early PHEVs could travel maybe 40-50km on electricity alone, whereas newer ones are exceeding 100km.

“The problem with plug-in hybrids will be the new technology that's coming out; if I have a plug-in hybrid that does 40km on a charge and the new ones do 120km, there’s an impact on used ones.”

As for EVs, Booth says they perform the worst of the lot, creating challenges for buyers as the market matures.

The advantage for buyers, of course, is the potential in some instances to pick up a decent EV for less money than an equivalent ICE vehicle.