COEs May Never Be ‘Cheap’ Again



 

It’s in the papers, in kopitiam talk and we’ve even said so ourselves here on CarBuyer.com.sg: within the next 18 months or so, COE prices are going to fall.

There is solid evidence to back it up as well: Since the main component of COE quotas is still de-registrations, and with the integral 10-year lifespan of a COE, whatever goes into the market must also eventually come out of it.

With a huge number of cars now scraping closer the 10-year limit can thus expect more COEs to re-enter the system.

An immense 73 percent of cars in Singapore are more than five years of age.

As of August 2014, 9.1 percent (56,271) of the passenger car population are between nine and 10 years old, 17.6 percent  (109,256) are eight to nine years old, and 17.8 percent (109,996) are seven to eight years old. 

More COEs equals lower prices. Simple, right?

It’s this sort of thinking that has kept COE prices relatively calmer in the past weeks – but there’s more to the story. As one sales manager of a European brand told CarBuyer, “When people talk about COEs becoming cheap, they think of maybe $20,000 to $30,000. But relative to those prices, I don’t think COEs can ever reach that level again.” 

Here are three reasons why: 

1. Old Cars Will Be Replaced By New Ones

In the past few weeks, prices for COEs have generally gone down and stabilised as well, the reason for this being everyone knows COE prices are dropping and aren’t buying.

The flipside of that, is there are still people buying cars. According to car trade-in and customer surveys, “Currently the buyers we see now have COEs expiring soon – we’re talking like two or three months left. A lot of them are MPV drivers from one-car families, so they have to buy a new car now,” said the sales manager.

Why are there so many vehicles approaching the 10-year mark in Singapore? High COE prices of the past five years meant most car owners held onto their COEs for as long as possible, and now they have to buy a new car.

But Singapore 2014 obviously isn’t Singapore 2007 – the general population and the car population are at their highest levels ever. When more people compete for a slice of the same pie, in this case it’s those with more cash who will get COEs.  That might keep demand, and prices, buoyant.

READ MORE:

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2. Barriers To Entry Aren’t As Big

Financial restrictions to curb car ownership were introduced in 2013, with the maximum loan amount being decreased to 60 percent for cheaper cars (50 percent for more expensive ones above OMV of $20,000) and maximum loan period of five years.

The basic aim of this was to discourage car ownership – there’s no other way of putting it. The MAS said it was to encourage ‘financial prudence’ but we’ll let you draw your own conclusions there.

With the most affordable cars now costing a minimum of $100,000 with COE, in other words you need at least $40,000 to get your new car show on the road.

But here’s the thing: As COE prices go down, that minimum sum will also go down. And we should also consider that there could be a group of potential car buyers who have already been forced to abandon their cars, or hopes of owning one, in the past five years because of high COE prices and now have the money to re-enter. How big is this group? We have no idea, basically it’s anyone with the financial means and a driving licence.  

 

3. The LTA will probably do the right thing

 

The events of the past ten years have shown a major failing of the COE system that wasn’t seen before: That of catastrophic, long-term market fluctuations, and as described above, high COE prices can have other unforeseen effects we can only guess at right now.

The LTA has done the right thing by necessarily cutting COE quotas drastically. It’s not rocket science, as car population control is needed to prevent Singapore becoming one big Jakarta-style jam. While some other policies have had questionable usefulness, it’s clear that long-term management of COE quotas is needed, something the LTA itself has said it is currently investigating.

“All of us know that something needs to be done to avoid fluctuations. When the COE prices come down, we can hire a lot of people, but we will also end up firing them if the prices rise again,” said Steffen Schwarz, the managing director of Volkswagen Singapore at a recent launch event. “The COE needs to managed, and the government needs to do something about this.”

And no matter what, this necessarily involves smoothening out the waves, so to speak, adding COEs when there are less of them, and removing COEs when there are more of them. Given the figures cited, we can hardly imagine the LTA standing by and letting the oncoming flood of de-registrations/new COEs wash in unmanaged.

That itself might raise COE prices too, over the long run. But it will be for a good reason at least – COE prices may not become as low as we remember with rose-tinted glasses, but they also may not be as high as the nightmarish figures of the past five years.

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about the author

Derryn Wong