Barefoot Investor: Why price of cars in Australia surged during 2020

Aren’t cars supposed to fall in value? Normally, yes. Yet in 2020, like most things, the car market had a bingle and prices surged. Here’s why.

Author and Financial advisor, Scott Pape

“Tick-tick-tick-tick.”

Our family wagon was having a moment.

The indicator seemed to be hyperventilating, ticking madly at triple speed.

‘Probably nothing’, I thought to myself.

Then a red warning light began flashing: ‘brake light failure’.

Okay, so brake lights are kind of a non-negotiable.

I detoured to the local mechanic’s, just to be on the safe side.

“You got rats!” he announced after popping the bonnet.

“They’ve chewed through nearly all the wiring … I’m surprised you couldn’t smell them.”

I was not surprised. Our family wagon is a house party for a mouse party: half-eaten Cruskits, discarded Vegemite toast, rotting peaches, even the odd nappy. It’s revolting.

So serves us right, right?

Well, our other car — my car — is a strict ‘no food zone’, yet as soon as I got home and opened the door I knew Mickey and his mates had spent the weekend partying there too.

(Life on the farm has its drawbacks.)

Yet what happened next floored us:

The insurance company got the mechanic’s bill to painstakingly strip back both cars and redo all the wiring … and decided it would be cheaper to write off both our cars instead!

So, being the Barefoot Investor, I set off to buy two used cars.

And that was when the real trouble started.

My first call was to a mate who works at a used car dealership in the bush:

“Sorry, I’ve got no stock”, he said. “I sold the last two cars on the lot to a dealer in Perth! He’s transporting them over there for god sakes! In my 25 years in this industry, I have never seen anything like it.”

He was right.

Over the next few weeks, every used car I looked at was priced around 30% higher than Redbook (the industry pricing database) indicated it should be.

What was going on?

Aren’t cars supposed to fall in value?

Normally, yes.

In fact, by as much as 40% over the first five years.

Why?

Well, mainly because we Aussies purchase around 1.1 million brand-new cars each year. (A staggering figure given there’s only 25 million of us on the island!)

Yet in 2020, like most things, the car market had a bingle.

We still wanted to buy cars, especially to escape the great unwashed on public transport.

Yet, because of COVID-related factory closures, the global car industry supplied 23% fewer cars in 2020 than normal. And so demand spilt over to the used car market: Moody’s Analytics found that second-hand car prices increased 36% last year — the biggest on record.

In other words, for the first time ever, the demand for cars outstripped the supply.

So in the end we split the difference and bought both a new and a used car.

Which shows just how fortunate we are.

Spare a thought for young people: not only have they borne the brunt of the COVID lay-offs (being part-time and casual workers), but the cost of their first set of wheels has just gone up by a third!

If that’s you, don’t panic.

Truth is, you have a wonderfully long road-trip full of adventure ahead.

And remember, one day that open road may turn into a school run. You’ll find yourself behind the wheel of a people-mover, with cranky kids in the back and a woeful whiff of rotting peaches (and mice droppings) coming through the vents.

Soak in the smell of freedom while it lasts!

Tread Your Own Path!

YOU’RE A DOG, BAREFOOT

Hey Scott,

I am 23, a medical receptionist, and have been trading crypto since lockdown — and killing it, especially in DOGE (Dogecoin). I read your article on DOGE, and it was a joke. Who do I trust more, some hack from Australia or THE WORLD’S RICHEST MAN — genius Elon Musk? You don’t get rich buying index funds, loser.

Kerrie

Hey Kerrie,

Don’t bite me!

All I was doing was quoting the creator of Dogecoin, who said:

“It doesn’t make sense. It’s super absurd. The coin design was absurd.”

Dogecoin was set up as a joke. It has no tangible value, other than as a gambling chip at a crypto-casino … which just so happens to have Elon Musk sitting at the table.

Why is he buying Dogecoin?

I have no idea.

Maybe it’s about his insatiable appetite for attention. Perhaps it’s to stroke his own ego. Maybe it’s both.

Yet while Musk is a genius, and the world’s (second) richest man, that doesn’t automatically mean you should take financial advice from him.

After all, his decision to throw millions at Dogecoin is like you or me buying a scratchie.

He’s worth $US190 billion!

He could drop $200 million down the back seat of his Tesla and he wouldn’t even notice it.

Billionaires are different to people like you and me. They don’t have to worry about things like buying a home, or paying off their HECS, or funding their retirement.

Most of us do.

And to achieve them we need to invest intelligently for the very long term. And history has proven emphatically that the most intelligent long-term investment is a broad-based index fund.

No joke.

YOU ALARMED ME!

Hey Scott,

A bit confused about your column ‘Financial Markets Are a Dog’s Breakfast’. Are you saying the stock market is a farce and will fail due to all the extra money printing and zero interest rates? I am a big-time Barefooter who is heavily investing in stocks right now, so would you please explain what you mean?

Harriet

Hi Harriet,

Let me say this right upfront: I’m still invested in the share market, and I don’t plan on ever selling.

What I was referring to last week was the frothy end of the market — like Dogecoin. The fact is that money-printing and low interest rates are driving up the prices of everything, and some of that is spilling over to crazy stuff like Dogecoin.

Look, there’s a lot of easy money being made right now (which explains why almost every 22-year-old kid I meet these days seems to be an investment guru.)

Yet history tells me these things don’t last.

So what should you do?

Well, you could follow my lead and do nothing.

As I explain in my book, you should think of your share portfolio like a little apple tree. You’ve planted it. There’s no need to move it, or worry about it. Just leave it to do its thing. And in 20 or 30 years’ time, just like an apple tree, it will produce amazing apples that will feed you and your grandkids.

Finally, to your question: the stock market is not a farce. Over the long term the riskiest thing you can do with the share market … is to not invest in it.

Because at the end of the day, Harriet, she’ll be apples!

SCOOTING AWAY

Hi Scott

I would like to thank you for your Barefoot Investor for Families guide. I have two girls — almost four and almost six — and we have implemented your ‘3 jam jars, 3 jobs, 3 minutes’ regime. It is amazing how much can be achieved with a spray bottle and cloth. My eldest daughter just bought her first scooter with her saved money. Her pride in her achievement is priceless.

Regards, Maxine

Hi Maxine,

You nailed it:

It’s amazing how much can be achieved with a spray bottle and cloth.

Here’s the thing: every parent tries pocket money at least once, and it generally fizzles out after a while.

Maxine’s five-year-old bought a scooter with her savings

Yet if you’re reading this, just have a look at Maxine’s daughter’s eyes … and tell me it’s not worth an hour of your time on a Sunday to wrangle your kids to get them to do their jobs.

Something amazing happens to a kid when they work hard, save up, and buy something on their own.

Congratulations, and tell your daughter that’s the coolest scooter I’ve seen in a long while!

Information and opinions provided in this column are general in nature and have been prepared for educational purposes only. Always seek personal financial advice tailored to your specific needs before making financial and investment decisions.

If you have a money question, go to barefootinvestor.com and #askbarefoot.

Barefoot Investor for Families: the only kids’ money guide you’ll ever need

Originally published as Barefoot Investor: Why price of cars in Australia surged during 2020