Are you a financial advisor counseling clients on collectible car investments? Investors have been noticing the collectible car market. And for good reason – it's grown spectacularly. Though the end of 2015, the rare collectible automotive market was up more than 500% for the decade, according to figures from the Historic Automobile Group International (HAGI) which tracks vintage collectibles through a number of indexes. By comparison, the S&P 500 only went up about 64% in the decade. But recent activity seems to show the classic car market leveling off and that such investments correlate to the overall market.

The Numbers

A series of classic car auctions held each January around Scottsdale, Ariz., showed flat prices for top-end collectibles. Total sales through Jan. 30 stood at $242 million, down more than 10% compared to last year's auctions. The average sale price was $104,000 this year, compared to nearly $120,000 in 2015, according to figures from Hagerty, the well-known classic car insurance and pricing company. (For more, see: Investing in Collectible Cars: Top Tips and Risks.)

So, are we experiencing a bubble in classic car prices, and if so, might that bubble be about to burst?

“To me, it indeed looks like a bubble in many segments of the market,” said David Bentson, a principal at Precision Automotive Group, which advises on buying, selling, and maintaining classic automobiles. “We are seeing highly inflated prices in the market for air-cooled Porsches and Ferraris, for instance.”

Indeed, some rarer models from those brands have sold for truly staggering prices. For instance, the Ferrari 250 race car from the early 1960s has sold for more than $38 million. Bentson explained that demand has outgrown supply in the classic car market. “Collecting used to be the domain of car guys,” he said. “In recent years, however, people are getting involved with the market purely as an investment.”  (For more, see: see: 5 Tips for Vintage Car Collecting.)

This extra demand from non-enthusiasts is driving up prices, Bentson said, but will also exacerbate an eventual price fall. “If you have a collectible car you love, you probably aren't going to sell it even if you see its financial value dropping. But those who collect cars solely as investments are much more likely to quickly dump them if the market falls.” Bentson noted that he expected prices to fall in parts of the collector car market in the coming months. “This market is cyclical, but it's not tied to the stock market or even the value of other collectibles,” he said.

Classic Car Correction?

If the collectible car market is due for a correction, there's no telling how severe it might be. "We have certainly experienced a boom over the last decade but the years with the strongest growth seem to be behind us," said Dietrich Hatlapa, founder of HAGI. He noted that his main index, the HAFI Top Index grew more than 45% in 2013, but in the two years since growth declined to about 16% annually. (For more, see: The Best Sports Cars for Investors.)

Investors must understand that just as real estate prices can go up most years, but still suffer periodic corrections, so too does the collectible car market face corrections. "Nothing goes up forever and all the time," Hatlapa said. "It is absolutely possible that prices will come down, especially in some sections of the market. You just have to look at other collectors' markets where we have seen significant corrections since the financial crisis in 2008."

The experts warn that corrections can happen quickly, especially when macroeconomic factors influence investor behavior. Hatlapa noted that in the second and third quarter of 2009, in the wake of the financial crisis, his firm's index for classic Ferraris corrected by more than 15%. What sectors within the classic car market seem most secure against substantial loss? "Quality and rarity are the main factors offering protecting during periods of market weakness," Hatlapa said. He said that cars with a known and interesting history (such as race cars) tend to hold their value better than most, as do those in top condition retaining all original components. (For more, see: 3 Alternative Investments the Ultra-Rich Usually Own.)

Investing in cars is not for the meek or cash-strapped. Beyond the initial purchase price, there's also restoration costs to consider, as well as outlays for ongoing maintenance, storage and insurance. These costs add up, even at the low end of the market.

Currently, an investor can buy a decent 1990 Mercedes-Benz 500SL for about $10,000. That's not so much. But that fine piece of German engineering is now 26 years old. A replacement inner door panel insert can run more than $300, without labor costs. If the removable hard top is damaged, a replacement could cost another $1,400. The SL also comes with a soft top, and endless other parts that might need to be sourced and replaced.

The Bottom Line

If you're advising an investor on the collectible car market, the best advice may simply buy what they love. Collecting what one personally enjoys is safer than collecting solely for investment purposes. After all, collectible cars can be subject to the vicissitudes of the market just as stocks, real estate or other asset classes are. Owning a classic provides social recognition and owners can get personal value by driving the car, or even just looking at it. They can also reap networking benefits by socializing with other enthusiasts at car shows and events. A car that excited someone as a teenager will still excite them as an adult and that's worth something. (For more, see: The Risk of Investing in Art and Collectibles.)