[Customers looking at second-hand cars at the Automobile Megamart in Ubi.]

By Kor Kian Beng, Political Correspondent

THE spike in certificate of entitlement (COE) premiums and car prices this week was not caused by changes to a formula to determine the number of replacement COEs, Second Transport Minister Lim Hwee Hua said yesterday.

Instead, there are a host of reasons for the spike in the COE prices, including market forces and economic conditions, she told reporters after a community dialogue at the end of her visit to the Kampong Ubi-Kembangan constituency.

She also advised potential car buyers deciding on whether to make a purchase, to consider factors such as how often they will use the car and ownership costs.

Mrs Lim's remarks came days after the latest COE prices soared by $8,000 to $14,000, surprising many in the industry and sparking calls for calm.

Some dealers jacked up prices by as much as $22,000, attributing the hike to an anticipated cut in COE supply next month as a result of a new formula to determine the number of new vehicles allowed.

It will be based on the actual number of vehicles taken off the road in a preceding six-month period - and not on a forecast of deregistration over 12 months as has been the case up to now.

Mrs Lim sought to clarify what she described as flawed thinking among some that the reduction in the number of COEs following the change in the formula was the reason COE prices rose.

'But actually 'no'. It's a function of the number of cars that are deregistered,' said Mrs Lim. 'If we have a drop in the number of cars that are deregistered, then the number of COEs available obviously goes down.'

While this would mean lower COE supply, it could also mean lower demand as lower deregistration numbers imply that more people are holding on to their cars, she added.

Industry observers said other factors that generate demand can include the launch of new models.

Reiterating that the COE system is left strictly to market forces, she was of the view that the market will 'correct itself'.

Asked yesterday if she foresees COE premiums going close to the dizzying levels of above $100,000 in the mid-1990s, she said: 'I'm not trading in the COE market ... But like I said, the market should find its own level. I'm not sure if there's a lot of speculation or anticipation of rising prices (and) that's why the prices have gone up. It's something where there are a lot of forces at work.'

She said COE prices are 'more driven' by economic conditions, pointing out that there have been more than two occasions where prices fell even when the supply of COEs also dropped.

Said Mrs Lim: 'During those instances, the economy was giving some uncertainty to people's spending patterns. So even though there were fewer COEs, the prices didn't really go up. So it's very difficult to say which way it will go.'

A Transport Ministry spokesman later gave details of these two instances:

• COEs for Category A (below 1,600cc) dropped to $2 in November 2008, despite quotas being cut by 31 per cent over the preceding two years.
• COEs for Category B (above 1,600cc) hit a low of $200 in January last year, despite quotas being cut by 13 per cent over the preceding two years.

This article was first published in The Straits Times.

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