Two weeks ago, the Land Transport Authority (LTA) announced that it has revised the annual growth rate for the number of cars in Singapore from the current 0.25% to 0%, with effect from February 2018 onwards. This will only be reviewed again in 2020.
Most news from mainstream media have cantered around how industry experts are expecting COE prices to continue staying high or even increase as a result of COE supply not growing, especially if the demand for COE continues to stay high. But how likely would that be?
Supply & Demand Determine Prices
Prices of COE are determined by supply and demand. If there many available COE and not enough bidders, prices would be lower. If there were limited COE and a high demand, prices would naturally become higher.
It’s worth noting that more often than not, COE prices are reflected in the overall price of a car. For example, if car dealers expect COE prices to increase, they will increase the price of a new car as a result of that expectation. The opposite also holds true.
What Determines COE Supply?
COE quotas are announced every quarter by LTA. For the period of November 2017 to January 2018, there will be a total of 25,913 COEs made available, or about 8,637 per month across the five different COE categories.
Here’s the formula that determines COE quota.
>> Provision for annual vehicle growth rate based on the vehicle population at the end of the year.
>> Replacement COEs from vehicles deregistered in the preceding three-month period.
>> Adjustment for changes in the taxi population, replacement of commercial vehicles under the Early Turnover Scheme, and expired COEs.
The annual vehicle growth rate will be 0% until 2020. That means moving forward, it will be a non-factor. COE quota will be determined by just two factors.
(i) Vehicles that are de-registered in the preceding three-month period
(ii) Adjustment for changes in the taxi population and expired COEs
Over the past few years, the number of car owners who have decided to renew their COEs have increased significantly. In 2015, close to 10,000 car owners renewed their COE, which is more than four times the number of renewed COE in 2014. In 2016, the number went up to almost 30,000, a three-fold increase. It’s likely that we will see the number continue remaining high in 2017 and 2018.
The irony of how the current COE system operates is that as COE price goes up, more car owners may choose to renew their COE, as opposed to buying a new car that would cost much more.
This in turn means less vehicles being de-registered, leading to even lower COE supply. As quota declines, COE price increases, further leading to even more people preferring to renew their COE as a result of high price. The vicious cycle continues.
Ironically, this would lead to more older cars on the road in spite of the fact that one of the reasons for having COE is to keep the vehicle population in Singapore young.
Read Also: Should You Renew Your COE Or Buy A New Car
What Impacts Demand?
Demand for COE refers to how many people being interested to buy new cars. There are a few factors that can affect demand.
#1 Economic Outlook
When the economy is doing well, people tend to have better paying jobs. This leads to a positive outlook for the future and people being more willing to spend today, including luxury items such as a car. Hence demand increases.
The opposite holds true. During a recession, people are hard hit and may find themselves out of job or having to take a pay cut. Those who are not affected may also be wary to spend.
#2 Arrival Of The Latest Car Model
When the latest car models are introduced to the market, demand for these cars increase. This would increase overall COE demand and thus, price of COE will increase.
#3 Expectations Of Future Price
Since COE price are driven by demand, buyers’ expectations of future price matters. Here’s one example to consider.
On 19 November 2008, COE price for Category A fell to a record $2. Yes, you read that right, $2.
Though this occurred in the midst of the global financial crisis, it immediately brought buyers back into the market. The rationale here is easy to understand. With COE prices already at $2, the only direction prices are heading is up.
The expectation that prices are going to increase is what ultimately brought buyers back into car showrooms. In the next COE exercise, price of Category A COE increased to $7,721.
Similarly, when Category B COE dipped to $38,610 on February 2016, car buyers immediately flock to showrooms to take advantage of the lower COE price. The effect of this is that prices immediately rebounded back to $46,970 in the next exercise.
People’s Perception Matters
How people react to the high cost of COE would determine its future price. On one hand, if the high cost of buying and owning a car in Singapore leads to more people giving up car ownership completely, rather than to renew their COE, demand would decline, leading to lower COE prices.
On the other hand, if the increase (or perceived future increase) in COE price leads to more car owners renewing their COE, instead of giving up their car, future COE supply will decline, and that is likely to lead to higher COE prices.
One action leads to a decline in demand, another leads to a decline in supply.
What do you think is going to happen next to COE prices? Share it with us on Facebook.
DollarsAndSense.sg aims to provide interesting, bite-sized financial articles that are relevant to all Singaporeans. Subscribe to our free e-newsletter to receive exclusive content not available anywhere else. Also follow us on Instagram to get your dose of finance knowledge visually.
Bonds and Fixed Income