5 myths about the COE system



Singapore’s Certificate of Entitlement (COE) system is oft the target of criticism, but here are five things you may not know about it


Originally published in 2014
Updated in May 2020

SINGAPORE

The COE system is one of the most disliked things about car ownership here.

It’s a sensitive touchpoint for the cost of owning a car here too, but that also leads to no shortage of misconceptions about the COE market, either.

Here are just five:

1. The Government itself sets high COE prices

COE prices are usually bundled with car price as a total package


Just to be clear, the Land Transport Authority (or LTA) doesn’t set COE prices directly.

The Quota System is a simple price mechanism that works on demand and supply. The goal of the Quota System is to limit vehicle sales, so if every new car registered requires a COE, the LTA can control sales directly. If it wants 2,000 new vehicles to be sold every month, it releases 2,000 COEs.

The LTA only controls the supply of COEs, and the final price is set by the demand for new vehicles. And demand, say economists, is a function of willingness and ability to pay for something.

Thus, COE prices are at a level where, by definition, people are willing and able to pay for them.

2. Car sales are down because COEs are expensive


“Thanks to… COE prices rising to ridiculous levels (Certificate FOR the “entitled” more like it), it’s no wonder car sales have dropped by almost 40 percent,” wrote MoneySmart’s Jeff Cuellar in January 2014.

Yet, it is the other way around. Car sales are down only because the COE supply is down. And of course, it’s this scarcity of COEs that has made them expensive.

In economics terms, whenever a normal good becomes more scarce, its price goes up if there’s no corresponding drop in demand.

Imagine how expensive an iPhone 5S would be if there were only 1,000 of them in the world. In that scenario, saying that car sales are down because COEs are expensive would be like saying Apple only managed to sell 1,000 of the iPhone 5S because it was so pricey.

3. Expensive COEs always put more money into the LTA’s coffers

Gimme that lovely cashmoney

COE prices are, relatively speaking, quite low right now in 2020 – all of them well below S$50k.

But let’s look at history: March’s first bidding for COEs in 2014 for example where Cat A COEs hit S$76,999, and CAt B S$80,710. Prices at that level gained a tidy sum for the LTA from car buyers, nearly S$69.8 million by our reckoning.

That’s slightly more on a year-on-year basis compared to 2015, especially when compared to the depths of the market in the past — $4,890 for a Cat A COE from early March 2009, anyone?

Yet, it ain’t necessarily so that pricey COEs automatically mean more money for the LTA.

If you go back two years to the first auction of March 2012, you’ll find the LTA raked in more than $88 million from car buyers that week. That’s in spite of the fact that each COE was cheaper than they are now. Category A certificates cost $56,551 apiece, although admittedly, the B and E certificates were very near the $80,000 level of March 2014.

In fact, if you go back one more year to March 2011, the COEs were much cheaper: A, B and E certificates cost $42,600, $61,894 and $62,010 respectively. But that week, the LTA scooped in close to $68.9 million, almost the same amount as March 2014.

It’s probably the case that no one at the LTA complains if COE revenues are high, but at the same time, it’s very likely the case that they don’t specifically try to engineer high prices.

4. Car dealers are responsible for pushing up prices

Car dealers don’t benefit from high COE prices


One easy villain to blame for high COE prices is the car dealer, who bids whatever he likes for a certificate (kicking a kitten or two along the way to work) and then passes the cost on to you, right?

Actually, car dealers despise high COE prices. That’s because expensive COEs lead to losses.

The challenge of being a car dealer here is that you must price your car as a machine-and-COE bundle. Then you collect an order from a customer, and bid for a COE on the customer’s behalf.

So imagine if you’re a car dealer and you know your cost for a machine is, say, $40,000. Suppose you aim for a $10,000 profit, and for simplicity’s sake, you think a relevant COE is going to cost $50,000 in two weeks. So you price your car at $100,000 with COE ($40,000 for the car, $10,000 for profit and $50,000 for the COE, remember).

A buyer comes along and books it, and you promise to deliver the car for $100,000. Two weeks later, the COE has shot up to $55,000. Oops. But you already sold the car for $100,000. Guess who has to suffer the consequences?

In fact, whenever COEs go up, car dealers take a hit from their margins for cars that they’ve already sold. So it’s really in their interest to bid as little as possible.

Again, let’s look at hard facts: The LTA provides data on the how successful bids were in the system – example, 2020’s data.

Simply look at the bid structure – compare Category A (mainstream cars) to Category D (motorcycles, which are still seeing high COE prices now) – pretty much all the car bids were less than five percent from the actual winning price level. That means everyone on the market is playing nice – the opposite of that would be a higher number of bids above 10 percent.

Ultimately, it’s ridiculous to blame dealers for pushing up COE prices. If a dealer bids $80,000 for a COE, it’s because he has already sold a car with that sort of COE pricing in mind to a buyer who was perfectly willing to pay that amount.

5. The Quota System is meant to be fair


This one is perhaps the toughest idea to swallow, but the COE mechanism is meant to exclude people from owning cars, not to include them. By design, it is meant to price people out of cars and into public transport.

Essentially it introduces a market distortion (by artificially limiting supply) that causes prices to rise to a point in which people drop out of the competition for a new car. The problem is not so much that the Quota System makes cars expensive, but that the distortions it introduces are unpalatable. Should a Volkswagen Scirocco 1.4 TSI buyer be forced to compete with a Lamborghini buyer for the same (Category B) certificate? Probably not.

But on the whole, complaining that the COE system isn’t inclusive is like saying it isn’t fair that you can’t afford a Rolex. If the Quota System has kept you from buying a new car, unfortunately that is precisely what it was designed to do.

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CarBuyer Team
CarBuyer Singapore / CarBuyer.com.sg brings the most relevant, accurate and useful car news to Singaporeans in both print and online formats.