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​Why COE prices no longer driven primarily by supply

Published on: 02-Nov-2020

Singapore is in the midst of a pandemic-induced economic slump, so why are certificate of entitlement (COE) prices still so high?

That has been a common refrain in coffee shops and online forums alike, as car COE premiums hover at their highest levels this year - with no immediate signs of a slide.

At the latest tender on Oct 21, the COE price for cars up to 1,600cc and 130bhp - which accounts for the bulk of car certificates - closed at $37,334, more than $5,000 higher than their $32,309 premium at the same time last year.

Why are COE prices trending at such levels when the country is experiencing its deepest recession since independence, and the resident unemployment rate is at 4.5 per cent, its highest since the global financial crisis in 2008?

The short answer is that COE prices, like most things, are influenced by supply and demand.

The supply of certificates is determined largely by the number of vehicles being scrapped, which follows a 10-year cycle (as each COE is valid for 10 years). And the supply this year is at its lowest in five years.

The longer answer involves looking at how much bearing external factors have had on COE prices over the years.

To do this, The Straits Times plotted a chart showing the supply and average price of Category A COE (for cars up to 1,600cc) from 1999, the year car COE categories were reduced from four to two.

The 22-year chart includes major global and local events.

Coincidentally, this year's supply is almost identical to 1999's. But the average Cat A price is 20 per cent lower than what it was in 1999, when Singapore rebounded from the 1997-98 Asian financial crisis.

This is one example of an external factor exerting an influence on COE prices, but the influence is not always dramatic, as there are other underlying factors at play. In the case of 1999 versus this year, we have to take into account, for instance, a 50 per cent population growth, offset by a 60 per cent increase in public transport usage.

Indeed, COE prices have moved generally in the opposite direction of quota sizes. Meaning, the smaller the quota, the higher the prices; and the larger the quota, the lower the prices. But something strange happened between 2015 and this year, when a downward supply trend was met with a downward price trend.

Mr Ron Lim, sales and marketing head at Nissan agent Tan Chong Motor, said two new factors have diminished the influence that supply had on prices.

One is the increased popularity of COE revalidation, where motorists pay a prevailing quota premium to extend the validity of their car's COE beyond 10 years.

"Prior to 2015, COE extensions were almost unheard of," Mr Lim said, adding that the new trend has inevitably created a price ceiling for COEs "as drivers now have a viable and acceptable option of simply extending the life of their vehicles if they feel COE prices are too high".

In 2015, nearly 10,000 car COEs were revalidated - 10 times the average of the preceding five years.

The second factor was the arrival of private-hire operators.

Although Uber and Grab started operations here in 2013, they started building up their own fleets later. But once they started, the two (especially Uber) expanded aggressively.

In 2015, the number of chauffeured private-hire cars hit 10,485 - up from just 1,609 in 2014 and 614 in 2013. By the end of last year, the figure had soared to 55,575.

This, Mr Lim noted, created a "price floor". So, premiums did not fall as much as in the previous period, when quotas were similar to what they have been in the last five years.

National University of Singapore's (NUS) department of analytics and operations' associate professor Chu Singfat said the influence that supply has on COE prices starts to diminish once the quota falls below a certain threshold.

For Cat A, he said the threshold was around 800 certificates per tender. From 2010 to 2014, the quotas were below this threshold.

When this happens, Prof Chu said, "bidding becomes emotional rather than rational", meaning bidders tend to bid higher than they would normally.

This was observed in 2013, which had the smallest quota on record. That year, Cat A premium soared to almost $80,000, while the Cat B price (for cars above 1,600cc) hovered just below $100,000.

In 2015, the number of chauffeured private-hire cars hit 10,485 - up from just 1,609 in 2014 and 614 in 2013. By the end of last year, the figure had soared to 55,575. This, Tan Chong Motor's Mr Ron Lim noted, created a "price floor". So, premiums did not fall as much as in the previous period, when quotas were similar to what they have been in the last five years.

CAR LOAN CURBS

The Monetary of Authority of Singapore quickly stepped in to reintroduce a curb on car loans, which immediately brought premiums back to earth.

In fact, average premiums have been heading south continuously since 2014, and began to creep up only this year.

Motor industry watchers said the buoyant prices in recent months were largely the result of pent-up demand, built up during a three-month bidding suspension from April to June - when the country went into a circuit breaker mode to prevent Covid-19 from spreading.

From July - when bidding resumed - to September, Cat A prices have been averaging $35,200 - up 7 per cent from $32,900 in the January-March period.

This blip is what Nanyang Business School's adjunct associate professor Zafar Momin might term as an "economic shock".

Using regression analysis (a statistical tool), Prof Momin, a former automotive expert at Boston Consulting, found that the correlation between COE supply and COE price was "excellent" from 1999 to 2008, when "one could predict COE premiums quite accurately just by using monthly quota data".

But, from 2009 to this year, COE supply became "less significant as a factor influencing COE prices". And this became even more apparent from 2014.

Prof Momin attributes this to "economic shocks" - unexpected events, as opposed to quota sizes, which are largely cyclical in nature and therefore somewhat predictable. He noted there have been more "economic shocks" in the last decade (2009-20) than in the preceding decade.

"Going forward, supply quotas will remain important influencers of COE prices," Prof Momin said, but added that "external shocks and market trends" cannot be ruled out.

"Since many of these external shocks and market trends are not anticipated... it is difficult to predict how they will influence the market or COE prices going forward."

To prevent supply shocks, Prof Chu proposed smoothening the annual quotas by "banking in" during times of plenty and releasing the saved certificates during lean times.

"I think this is eminently feasible," he said. "It is very similar to the active management of, say, the value of the Singapore dollar."

The need to do so, however, may have since been overtaken by events. With the prevailing trend of people holding on to their cars beyond 10 years, the peak-and-trough COE supply curve will be flatter in future cycles.

For instance, the vast majority of those who revalidated their car COEs between 2015 and 2018 did so for five years (instead of 10, because it involved a smaller outlay). These cars with five-year extensions will be scrapped from this year - adding thousands of "extra" COEs from the usual 10-year replacement cycle.

This should offset a foreseeable supply shrinkage arising from the same COE renewal trend. From 2013 to 2017, about one-third of new cars qualified for a generous carbon rebate.

Because of this rebate, their scrap rebates - forfeited upon COE extension - are also smaller. Hence, many owners will find it relatively painless to hold on to such cars.

In any case, as Prof Momin and Mr Lim have noted, supply now seems to have a less significant impact on price than before.

NUS transport researcher Lee Der-Horng agrees.

Prof Lee said future COE price trends may be altered by a fundamental shift in car ownership.

"Going forward, I would expect that the public's attitude towards car ownership will become more rational," he said. "Ultimately, the car is a tool, and there exists many substitutes, such as access to point-to-point transport services."


Source: The Straits Times, 2 Nov 2020

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