Why Do EVs Depreciate So Fast?

Car depreciation is the silent killer of your new car's original value over time. Many factors determine how much and how fast a vehicle's value will drop, such as age, brand, the number of kilometres it has been driven, and excessive wear and tear. The type of vehicle, such as a small compact car versus a big and luxurious SUV, will also affect a vehicle's value over its lifespan. And finally, whether a car is powered by fossil fuels or electricity also plays a large role in a vehicle's depreciation rate.

When they were first introduced, electric vehicles (EVs) depreciated much faster than internal combustion engine (ICE) cars due to rapid advancements in battery technology. These advancements, along with the introduction of newer models with better range and charging, made older EVs seem less desirable and worth less on the used car market.

Here's a breakdown of why EVs depreciate so fast and what it could mean for future prices.

Rapid Technological Advancements

Compared to the development of gas-powered vehicles that dates back to the 1880s, the technology that goes into a modern EV is relatively immature, constantly evolving, with new models, advancements and breakthroughs being made regularly.

For instance, over-the-air (OTA) software updates are a key selling point for buyers interested in EVs. But the fast pace of advancement also means that the newest models are usually more advanced than those released just a year or two earlier. 

Whether it's newer EVs with longer driving ranges, faster charging, or improved battery longevity, the potential for older models to feel outdated more quickly underscores the need for continuous innovation in the EV market.

EVs as Test Beds for New Technology

One aspect of the rapid technology development with EVs is the initial perception of questionable reliability. Manufacturers often target EVs at early adopters who are fans of innovation and willing to try cutting-edge technologies, sometimes even paying a premium to be among the first to experience it. While EVs are often test beds for new technology, this can lead to more electrical accessory and in-car electronics issues. 

While battery electric vehicles (BEVs) and plug-in hybrids (PHEVs) are still likely to have more problems than regular hybrid and conventional gas-only vehicles, a Consumer Reports annual reliability survey found that the latest electric models have fewer problems today than in the past. On average, BEVs in the past three model years have had 42 per cent more problems than gas-only cars, according to survey data. While this might sound dramatic, it's important to note that this is a significant improvement over the previous year’s survey results, when BEVs had 79 per cent more problems than gas-only cars, a testament to the ongoing improvements in EV reliability. 

Not to be outdone, PHEVs have also shown significant improvement in reliability. They now have 70 per cent fewer problems than gas-only cars, a substantial improvement from last year, when they had 146 per cent more problems than hybrid and gas-only vehicles.

Concerns over Longevity

A significant factor contributing to the depreciation of EVs is the concern many buyers have about owning one after the original factory warranty expires. Unlike traditional gas-powered vehicles, where maintenance and repair costs are more predictable and well-understood, EVs introduce uncertainty, particularly around battery life and replacement costs.

Additionally, the complexity of an EV's software and the reliance on over-the-air updates mean that some buyers fear they might encounter expensive or difficult-to-fix issues once the vehicle is out of warranty, such as a malfunctioning battery management system or a faulty electric motor. This hesitation can lead to a steeper depreciation curve as the vehicle ages and moves beyond its warranty period.

However, data suggests these concerns may be overstated, as battery degradation occurs more slowly than initially feared. This slower degradation should alleviate potential buyers' anxiety about the long-term performance of their EVs. 

One way to assess a vehicle's expected longevity is to check the manufacturer's replacement warranties. The most common new vehicle powertrain warranty offered for gas-powered cars from the major automakers is five years or 100,000 kilometres (160,000 km for diesel), whichever comes first. However, most EV manufacturers offer at least an eight-year/ 160,000-km warranty on battery packs. These EV warranties cover the complete failure of a battery pack and degradation.

New EV Model Introductions

The muscle car horsepower wars of the 1960s were a period of intense competition between automakers to produce increasingly powerful and high-performance cars. Each new model year saw automakers race to market with a flurry of new models with bigger engines and more horsepower. Today's EV market mirrors that intensity, but with a significant difference. Instead of the gas-guzzling V8s, automakers are now in a race to introduce EVs with larger batteries, longer ranges, and gobs of torque.

Let's look at Hyundai, for example. The automaker’s first BEV in Canada, the compact 2017 Ioniq Electric, had a range of about 200 kilometres. Since then, Hyundai has rolled out a fleet of BEVs (such as the subcompact Kona Electric, the mid-size Ioniq 5 and 6, and the forthcoming four-door Ioniq 9 three-row SUV for the 2026 model year), with some models offering up to three times the amount of driving range as the first electric Ioniq.

When manufacturers frequently introduce new models with upgraded features and price adjustments, this can significantly impact the resale value of older models. The discounts on new EVs can also affect the used market, making new cars more affordable and attractive to buyers. As automakers introduce new models and EV sales increase, the number of used EVs on the market also grows. This increased supply can drive down prices. 

Government Subsidies

The surge in EV sales last year is a clear indication of the effectiveness of government programs that offer incentives for electric cars. These rebates, especially those targeting price-sensitive consumers, drive initial demand. The discounts on new EVs, made possible by these programs, make them more attractive but also contribute to faster depreciation. 

It's important to understand that the price of an electric vehicle is directly affected by the tax credit available on that particular model, regardless of whether the purchaser is eligible for or receives the credit.

What Does the Future Hold for EV Values?

Industry analysts predict future EV values based on various factors, including battery production costs, emissions-based taxation, road charging schemes, and government incentives. So while EVs initially depreciated faster due to technological advancements and concerns about battery longevity, newer models are holding their value better, and the market is becoming more stable.

Recent data shows that BEVs tend to have an average price depreciation of nearly 49 per cent after five years. That’s similar to the average luxury vehicle’s 48 per cent drop, but not as much as a gasoline hybrid’s 37 per cent.

As EV prices continue to fall, it opens up opportunities for buyers who may not have considered them. With improving battery technology and growing public confidence in EVs, depreciation rates are expected to improve. This could make EVs more attractive and competitive in the used car market.