So, should you spend a bit more to get a fancier car?

This story originally appeared over at The New Daily. (They’ve asked me to write a consumer-focused story each week, which I will also post here)

I recently looked up the cheapest new car and the most expensive new car being advertised in Australia. I was gobsmacked at both ends of the spectrum.

At the very bottom end was a Mitsubishi Mirage, 2014 model, with only 15km on the clock. It cost $9,880 before on-road charges.

Screen Shot 2015-06-28 at 2.52.40 pm

The most expensive was a new Rolls Royce Phantom. The only one of its kind in Australia. Price $994,000, drive away, no more to pay.

Screen Shot 2015-06-27 at 11.29.16 am

That’s 100 times more expensive! Obviously you get big differences depending on which car you choose.

Only one of these cars has a 5-star ANCAP rating – the highest local standard for safety, and a 5-year warranty.

As you probably guessed, I’m talking about the Mirage. Yep. You can pay a million bucks for a car that has no official Aussie safety rating and a shorter (four-year) warranty.

The Mirage’s little motor also boasts far better fuel efficiency, at 4.6L/100km. That compares to 14.8L/100 km for the 12-cylinder engine beneath with the winged lady.

So the cheapest car is winning on some pretty important features. This made me wonder. What is the real difference between a cheap and expensive car?

Once upon a time it was reliability. Mercedes of old ran for hundreds of thousands of kilometres. Not so much any more.

The great industrialisation of Japan, from the middle of last century changed the game. The brilliant standardisation of quality pioneered by companies like Toyota made quality a starting point.

These days the car that endures that is likely to be a Honda or Subaru.

So luxury cars distinguished themselves with features. Leather seats. Sunroofs and electric windows. (Remember how exciting the smooth glide of an electric windows was when they first came in?) Cruise control and heated seats.

But it turned out that when you’re making millions of Camrys, it is possible to cheaply fit them all with an impressive swag of desirable features. So the game shifted again.

Now the luxury car distinguishes itself on some rather weird parameters.

The reviewers dwell on things like the noise the engine makes in a Porsche, or “a rather striking cherry wood inlay in the luggage area” in a new Mercedes.

Do these things matter to anyone who isn’t looking for a reason to buy an expensive car anyway? They remind me of the blueberry notes the labels are always so eloquent about in fancy bottles of wine. Important for an extremely refined few.

Most of us operate at a rather more prosaic level.

Let’s look at two vehicles in the fastest growing category around – “crossover” SUVS. Screen Shot 2015-07-01 at 1.37.05 pmScreen Shot 2015-07-01 at 1.37.34 pmA Ford Kuga costing around $26,000 and a Mercedes GLA costing around $55,000.

Here’s a comparison on some important features.

Screen Shot 2015-07-01 at 1.43.07 pm

Okay, I’m being facetious.

There are actual differences. For example, the Mercedes gives you 4.6L/100km, the Kuga 6.3L/100km. And there’s more:

Screen Shot 2015-07-01 at 1.43.14 pmThere are lots of other little differences too, in things that are probably good to have. But adding them up, are they worth an extra $30,000+?

The difference in comfort between a $25,000 car and $55,000 car is more slight than the difference between economy and business class on an aeroplane. If you sit in that car for an hour a day for ten years – 3650 hours – a $30,000 price difference means you’re paying a premium of $8 an hour.

Whether that $8 hourly rate looks like a worthwhile investment or a worthwhile saving depends on the person, and their income.

Interestingly, it seems income is a big factor.

Official statistics show the rich spend far more on cars than the poor. Households at the top of the income distribution spend eight times more on cars than the bottom of the distribution.

Maybe they can afford it. Maybe they value the small luxuries of life. But there’s another explanation possible too.

It is called signalling. On the African savannah, the male lion grows a mane which may actually harm its survival. Doing so and still managing to thrive shows it is super fit and healthy – and worth mating with.

Some experts think conspicuous consumption is similar in humans. Throwing money around announces to the world that you are special.

The larger and more frivolous the expenditure, the more effective the announcement. It makes sense – the person who buys that one-of-only-25-in-the-world Rolls Royce is far more likely to be someone trying to demonstrate something about themselves than a person with an extreme passion for fine wood inlays.

So when we see someone insisting they need electric lumbar support and alloy wheels, and the Mercedes is simply the best way to get that, we are probably justified to wonder whether they are falling into the trap of simply showing off.

Obviously, there’s a minimum price point –perhaps somewhere below $10,000 – where spending less on a car is a risk too big to take. And there’s a point – probably somewhere above $100,000 – where spending more is entirely silly. But where’s the tipping point? What’s too much to spend on a car? What’s too little? Please share your views below!

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thomasthethinkengine

Thomas the Think Engine is the blog of a trained economist. It comes to you from Melbourne Australia.

5 thoughts on “So, should you spend a bit more to get a fancier car?”

  1. Judging by the many well-suited men driving expensive cars around the carpark that counts as Sydney’s CBD, it seems clear to me that fancy cars, designer watches and cufflinks made from endangered species are status symbols above everything else. I think a more sensible person would ignore the $900,000 Rolls Royce and buy a new house or two. Hell, there’d probably be money left to buy the Mirage!

    Liked by 1 person

    1. A house or two? for 900k!? Maybe you could get two in the shadow of the smoke plume from Melbourne’s prison riot. (Derrimut has homes just metres from its walls.) In Sydney, 900k is a deposit on the median home… At these prices the roller starts to look like a screaming deal!

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      1. Perhaps one house (and Mirage) or a couple of apartments a couple of kilometres out from the city. Expensive, but property doesn’t normally depreciate in value the minute you buy it!

        Liked by 1 person

  2. Ahh yes, but there can still be value in showing off. I bought a $20k FIAT500s, which is a lot to pay for a micro car, but not much to pay for transport overall. In terms of smiles driving it and the seriously cool cred-factor we get from it, I’d say it punches above its weight.

    Liked by 1 person

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