Why Are New Cars So Expensive?

In the last century, we have been increasingly reliant on cars. New cars appear to be getting exponentially more expensive. Why is that? How does that affect us and the way we shop for cars?

I’m talking in a general sense. We could delve into the issue of component shortage during 2021, which was previously an issue because of factories closing down. However, that affected the prices of used cars more due to new cars not being as readily available.

According to J.D. Power, the average purchase price for a new car in August 2021 was up 10% from 2020 and used cars were up by 21%.

Used car prices are determined by desirability, availability and demand, whereas new car prices are carefully planned for the product to fit into a particular position in the market. Prices don’t fluctuate so much. I wanted to investigate what causes the prices of new cars to increase.

An easy target, but a necessary point: Inflation has an influence on the prices of new cars.

If you need a little introduction on inflation, it is the general increase in the price of goods and services over a period of time. It affects us all – The purchasing power of a currency.

In simple terms, it’s how much of that currency you need to spend to get what you want. It can be caused by things such as rising production costs, increased demand for goods and services or the injection of money into circulation.

There are three types of inflation, and all three can affect the prices customers pay when purchasing a new vehicle:

• Demand-Pull Inflation – This is when the demand of goods and services is exceeded by the supply available.
• Cost-Push Inflation – When production costs increase due to things such as raw material costs or wages.
• Built-In Inflation – As prices rise throughout the economy, workers demand higher wages to keep up.

Each of these will apply to one of the points covered in this article, but as a singular point, inflation as a whole can alter what you as the customer pay for your new car. If your income doesn’t increase at the same rate as the rest of the economy, you are having to generate more money to purchase a vehicle that has increased in price due to inflation.

Emissions and powertrain efficiency for passenger vehicles have been an easy target for scrutiny when it comes to new cars, especially since the first fuel crisis in 1973. As the cost of fuel and the demand for fuel-efficient vehicles increases, so does the cost of the vehicle. This contributes to the average purchase price increase in recent years, especially as targets are becoming harder to achieve.

Hybrid and electric cars cost more to produce; those costs are passed on to the customers. This is due to the development of the technology, the cost of manufacturing and the resources required to manufacture the vehicle.

Stringent safety and emissions regulations not only require more components to be fitted to the vehicle to comply but the development costs of the design are significantly increased. Man hours, prototypes, testing and certification all add up and need to be paid for. Being the big businesses they are, manufacturers aren’t going to swallow the cost. They need to see a return on their investment.

Unfortunately, as technologies develop and public interests shift, I would expect the quantity and cost of regulations to increase. As fully autonomous cars are being developed, you can bet all automakers will be required to navigate their way through a strict set of regulations.

Every decade we see a significant advancement in quality and technology. The sheer amount of technology incorporated into new cars is mostly incredible. However, I think we can do without gesture control and our climate control buttons being moved onto a large central screen.

The advancements in technology and having something on the next model to improve upon the last one cost significant amounts in research and development, manufacturing equipment and design. Even in the last two decades, the number of improvements we’ve seen is astounding. You can’t tell me the cost of all of the technological systems hasn’t increased significantly each decade. Material quality, infrared night vision, and assisted driving systems will carry significant development costs over the incorporation of a built-in phone into the centre console of your 2005 Volvo S60.

Every product has its own position in its relevant market. The auto industry is no different. As each manufacturer changes their product or pricing, another manufacturer might also make similar alterations to stay competitive. Although this varies from vehicle to vehicle, manufacturers often stick to their corners in the market.

There are a few exceptions however. Consider specialty vehicles such as the Lexus LFA or the Ford GT. They entered into the neighbourhoods of some exotic competition that Lexus and Ford had no business in entering, but I’m pleased they did.

Since the dive of inventory for new cars during 2021, manufacturers and dealerships are opting for a supply-on-demand strategy. Meaning they will hold less inventory, and vehicles will be ordered by the dealership to be reserved before delivery or ordered by the customer at the dealership to their own chosen specification.

This alteration in their logistical approach will reflect the prices customers pay for their new cars, which unfortunately may see dealer discounts become obsolete due to them not needing to shift stock that have been sat on the lot for too long.

As operational and manufacturing costs are on the rise and companies need to maintain a reasonable profit margin. This would primarily be covered as part of Cost-Push Inflation that I previously mentioned: When the cost of wages and raw materials lead to an increase in production costs.

Before I left my position at JBM Performance, a Volkswagen Audi Group tuning specialist, I noticed the price of parts going up significantly. It wasn’t a couple of percent here and there to account for inflation. We saw an increase of up to 15% for some items. Potentially implying that manufacturing costs are rising, as it doesn’t just affect new vehicles, but used too. This could be due to a number of factors related to Cost-Push Inflation, but there are a wide variety of parts on a vehicle that are produced in different ways that dictate the cost of production.

The costs implicated with the freight of vehicles is often overlooked. Not only has the demand increased for all types of logistical transportation, the price has too, which would indicate Demand-Pull Inflation. I’m aware there is a shortage of truck drivers to fulfill the requests for land transportation, which has increased the cost of moving vehicles around the world.

Thankfully, a few years ago in the United Kingdom, there were financial incentives introduced to entice people into training to be a truck driver, which could stabilise land transportation costs. However, I can’t imagine this will significantly impact the price customers pay for their new cars.

Car loans aren’t directly a part of the cost when buying a vehicle, however, most people buying a new car will be taking out financing for the purchase. It is a part of your costs to factor in when buying something of significant value.

When you take out finance on a car, you pay interest on the lump sum the lender pays to the dealer to purchase the vehicle. Let’s say you get an interest rate of 10%. On a $100,000 car, you are paying an additional 10% on top of the $100,000. That’s $110,000. Some of you might think that’s worth it, some won’t. Taking on debt is often the most efficient way to afford the things you want. That financial leverage comes at a price.

Now let’s say you purchase the same vehicle at 2.5%, you only pay $2500. That’s a $7500 saving. That’s not a sum of money to turn your nose up at. If your car salesman knocked off $7500, you would be ecstatic, but that is extremely unlikely when their margins are so small.

As I’m writing this, 10% or below in Vancouver where I’m currently living is considered reasonable. But if your credit is poor and you fall into the credit classification known as sub-prime; someone with a poor credit score, you could be looking at an interest rate of around 25%-30%. I spoke with someone I know in the industry who worked with sub-prime loans, who has offered a rate of 46.96% to a customer. Which is criminal to me and a very expensive way to throw money down the drain. But I will be expanding on this in another article in the future.

Based on this, one of the best ways to save money when buying a car is to maintain a good credit score and do your research on the economy; be smart about how and when you take on debt.

As many of us rely on our cars, hearing about another area of spending where prices have increased isn’t comforting. On top of that, the continuous increase of prices throughout the market is causing many customers who cycle their new cars every few years to “downgrade” or buy used.

Manufacturers have realised they can profit more from selling fewer vehicles at a higher price. Favouring loyal customers who will return to their franchised dealerships to have their cars repaired and serviced. I touched on this in another article a few months back and I don’t see it changing in the near future.

Let’s not forget that manufacturers are in the business of making money. They aren’t going to reduce prices or stall on increasing prices even to adjust for the rise of inflation, the reality is, they aren’t our friends and it’s not their responsibility to look after us. They sell something we want.

However, automakers have to be careful with their increases, even their most loyal customers may be swayed by an alternative brand if they don’t get their money’s worth.

There are many reasons why vehicle are expensive, the manufacturing and inflation being the most obvious. Although, I can’t imagine it would be possible to produce the vehicles we have today for a substantial amount less. The top 15 automaker’s profit margins in 2023 were between 5% and 15.4%. In general business terms, this isn’t a profit margin to shout about.

New cars will only continue to increase in price. However, I would expect the average cost of hybrid and electric vehicles to stabilise at some point once the EV race slows down. Although it’s hard to say when that would be, because I can confidently say that we’re not quite where we need to be just yet. Range, battery life and weight could still be improved further.

The best we can hope for right now is for lower interest rates. I am by no means a financial advisor, I can’t see whats around the corner, but I’m not holding my breath.

It’s probably best to focus on improving your credit score, rigorous saving, and making more money.

Or just buy lightly used.

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