Why millionaires drive old cars
Part 3: A short analysis of the car market
Cars are emotion. Emotions that are often decisive in purchasing a new car. And why not? Every modern car brings you safely from A to B. Whether it’s a Toyota Aygo or a Mercedes A-Class. But even the first, the cheapest car on the Dutch car market, is secretly quite expensive. The car costs more than 12000 Euro.
That cars at the end cost a pile of money, is the reason that people aren’t buying cars fully irrational. Most take the resale value of a car seriously into account.
The depreciation of a car is primarily determined by its purchase price and its mileage and age. But there are also various other aspects like:
- The brand
- The model
- The color
- Options
- Maintenance history
For example when you buy a Volkswagen Golf with decent options in the color black you have a higher chance for a good resale price.
All in all, the purchase price remains the biggest factor. For a long time, there have been a rule that the higher the purchase price, the higher the percentage depreciation. Thus, the Toyota Aygo can be sold after 5 years much closer to its purchase price than a Mercedes S-Class does.
The ‘cheap’ Aygo may just have a 10% deprecation, while the Mercedes S-Class has a 30% deprecation. This means that you can buy such a Mercedes after 10 years for reasonable price. At least if you can afford the prices at the gas pump for the Mercedes…
Car as an investment
There is however a category of cars that have no deprecation at all. To this category, the rule that the deprecation is higher when the purchase price is higher doesn’t apply anymore. On the contrary: Those cars are very high-priced. It’s a category with ultra expensive and rare cars. These cars actually gain in value.
Take for example Dutch entrepreneur Peter Gillis. He made a fortune with vacation parks. At the start of his career, he drove a car with low deprecation, the Volkswagen Golf. When he got wealthier, he moved to a Mercedes S-Class (of which he owned 17 so far!) with a high deprecation.
Today, however, he is among the wealthiest Dutchmen. That means he now can buy cars as an investment. Currently, he owns cars like:
- Ferrari 812 GTS
- Porsche 911 Cabrio
- Rolls-Royce Phantom
A quote from a car magazine (Autoweek 18, 2021) on his Ferrari:
“Someone convinced me, that it will be a rare car. That’s a must for every car I purchase. If I have to hedge on it, otherwise I won’t buy.”
This is of course great if you’re in this position. You can buy a Ferrari, own and drive it for 10 years and then sell it with profit.
Concentration of wealth
Of course, Peter Gilles is no exception among the rich. A lot of millionaires see cars as an investment. Especially the Ferraris from the 50s and 60s do well, but also much newer car were recently sold for record prices:
There is a saying that the rich get richer and the poor get poorer. This works slightly different for cars. In the car world it’s more like:
- Poor people: Can’t afford a car
- Lower middle-class: Cars with low deprecation
- Average middle-class: Cars with medium deprecation
- High middle-class: Cars with high deprecation
- Rich people: Cars are an investment.
In general, the rule still seems true. Like traditional economic laws don’t apply anymore when you are rich enough. The cars are investment because they are rare and desirable.
Still, the question is why there is so much demand and why is this demand monopolized by the rich? This has all to do with the concentration of wealth. In this sense, it has less to do with traditional supply and demand, but more on the return rate of capital. But that’s another story, where you better read Capital in the Twenty-First Century by the French economist Thomas Piketty.
Side note
By the way, buying cars as an investment only counts for millionaires. A billionaire like Mark Zuckerberg just drives a Volkswagen Golf for example (he mostly uses his plane anyway). Billionaires invest more in Virtual Reality, Space Rockets and Nuclear Energy.
Check here for part 1:
