Should I buy an electric car?
The government is promoting the purchase of electric cars, providing cash rebates for purchase of new or second-hand imported cars. A rebate of up to $8,625 is available for new electric cars costing less than $80,000. Up to $3,450 is available for used electric cars which have been registered in New Zealand for the first time. In addition to the cash rebates, electric cars aren’t currently required to pay road user charges. Road user charges for petrol vehicles are paid for through the tax on petrol.
The latest analysis from Gen Less suggests the total cost of owning an electric car is significantly less than for petrol cars over a five year period.
The five year cost for an electric vehicle was estimated to be $36,772 ($7,354 per year). That compares with $54,473 ($10,895 per year) for a petrol car.
However, you have to look behind the numbers
There are some key assumptions that affect the analysis of which option is better. The Gen Less estimates are based on:
Assumption 1: you purchase a new car
Most new cars are purchased by businesses or the self-employed because they can reduce their tax due to the high depreciation cost for new vehicles. Depreciation is an estimate for how much your vehicle declines in value on an annual basis. However, the tax reduction is only a portion of the fall in value of the vehicle.
The Gen Less analysis suggests the average new electric car will lose half of its value in the first five years. After five years the brand new car you purchased for 50,000 will be worth just $25,000. That’s a significant annual cost for owning a new car, costing you around $96 a week. That doesn’t include any of the costs involved with using your car.
The Gen Less analysis suggested the loss was even higher for petrol cars. They were worth only 43% of their original price after five years. That means a new car purchased for $50,000 would be worth only $21,500, losing $28,500 over five years.
There are few second-hand electric cars on the market, so that may explain some of the difference in depreciation rates between electric and petrol cars.
Assumption 2: you can purchase your car with cash
This is a key assumption because debt servicing significantly increases the cost of car ownership. That applies whether you finance it through the mortgage on your house or through car finance. Financing a $50,000 car purchase through a top up on your mortgage will cost you an additional $13,560 in interest. That’s assuming you pay it off over ten years at an interest rate of 5%, with weekly payments of $122.23 a week.
Mortgage interest rates are currently increasing and may reach 6% during the next 12 months. That would add a further $3,000 to the total interest cost over 10 years.
There is still a cost to you if you use cash. If you purchase a cheaper second-hand car you will continue to earn interest on the money you might have spent on a new car.
Assumption 3: you travel 17,970 km per year
This is higher than the average of 11,000 km a year for the average passenger car in New Zealand. The less the distance you drive in a year the less the estimated savings from owning an electric car.
Assumption 4: the cost of electricity is based on commercial power prices
Because of the high proportion of new car purchases by businesses the estimates are based on a commercial electricity cost of 17c/kwh (GST excl.) Ministry of Business, Innovation and Employment estimates show a household electricity cost of 27.64 cents in the March 2022 quarter (before discounts).
Items not estimated were:
- The cost of car insurance, which is higher when you have an expensive car.
- The cost of battery replacement. The average new car in New Zealand is retired after 21 years, clocking up 232,000 km in that time. You should assume the battery will have to be replaced at least once. Before buying a new or second-hand electric car it is worthwhile checking what a replacement battery will cost. It is suggested that battery costs will decline as the volume of electric car production increases. Despite this, battery replacement is still likely to be a significant expense.
- The cost of installing an in-home charger, which is a one-off cost, but a useful factor to think about now when buying a house.
Electric vehicles are currently exempt from road user charges, but the exemption is due to end by 31 March 2024. It is estimated the exemption currently saves electric vehicle owners around $600 a year.
There is a limited supply of second-hand electric cars in New Zealand, but supply is increasing. In the year to June 2022 there were 9,587 new fully electric cars imported into New Zealand and 20,482 hybrid electric cars. Over the same time period 3,767 second hand fully electric cars were imported and 29,724 hybrid cars.
It is important to research and understand the costs of time and money before making any purchase. “For which of you, desiring to build a tower, does not first sit down and count the cost, whether he has enough to complete it?” (Luke 14:28 ESV)
I recommend that you buy a used car, paying cash for one that will decline in value slowly. The world will sell you lots of reasons to buy a new car, but remember a car is simply a way to get from one place to another. Driving an older, reliable car is the best option financially.
Many households have more than one car and it is worthwhile looking at alternatives now available for transport to reduce the number of cars you own. The savings over a 40 year working life can be substantial.