By Derryn Wong

ON FEBRUARY 12, the Land Transport Authority (LTA) announced the COE quota for 2009. In accordance with its Land Transport Masterplan, a 1.5 percent reduction in total vehicle population comes into effect for the quota year 2009 (lasting from May 2009 until April 2010).

The net result is drop of 26,565 (24 percent) in the total number of available COEs, from 110,354 in 2008 to 83,789 in 2009 (see the chart below). More importantly, passenger car COE Categories A and B will fall by 28 and 31 percent respectively – almost one-third per category.

Since the car market here is artificially regulated by the COE system, generally speaking a drop in supply can only mean two things: If demand drops too, prices will stabilise. If demand remains the same (most likely) or increases, prices increase.

While the new quota year only takes effect in May, market-savvy buyers might be anticipating a COE hike and push up demand right away – this could even be the reason for the current COE spike (see our COE analysis at the back of the magazine).

The sales manager of a European brand echoed a sentiment shared by many on the market.

“I expect the COE to go up in perhaps the next two rounds but after that it should stabilise.” he said. “What we’re seeing now is a generally cautious market but of course there’s still a knee-jerk reaction from people like we saw during the $2 COE period. So prices will rise after the next two rounds, but I don’t think they’ll rise above $10,000.”

There are also some other factors to take into account. It’s almost certain that prices will rise, but it will affect different sectors of the market in different ways.

A rise in COE prices will favour premium brands more than budget ones, since the higher the cost of the COE, the less likely you’ll use it to buy a budget car.

“It’ll be good for us,” said a sales manager from a major Japanese brand we spoke to., “The jump in COE costs will price out cheaper cars. Major brands with a big market share will continue to work to retain their slice but marginal brands will be having a tough time of it.”

This is truer the more expensive COEs get, for example in the early 90s when COEs hit in excess of $100,000. If COEs pan out at around the $10,000 mark this year, the effect will be less exaggerated.

While the greater fall in available Cat B COEs might logically spell a bigger increase in prices for cars above 1.6-litres in capacity, this may not be the case in reality, according to the sales manager.

“I don’t think Cat B prices will rise because of this. The way I see it, there’s a shortage everywhere and mostly around the same level, so if both Cat A and B have shortages, everyone will turn to Open COEs instead.”

And there is one thing to consider other than just the COE: foreign currency exchange rates.

The European-brand manager feels that with a strong Japanese Yen and a weaker Euro, Japanese brands have less savings to pass onto consumers, although he did concede that major brands with factories in Asia will be less affected by this.

It’s a small edge but in the current situation of a cautious market favouring the buyer, every little bit counts. Ultimately though, we’ll have to look at the big picture for the best clues.

“It all depends on demand. Where the economy goes, consumers will follow,” said the Japanese-brand sales manager.