Should car buyers wait for COE prices to drop further?

Should car buyers wait for COE prices to drop further?

I'm not a fortune teller or a prophet. So when I predicted last August that COE prices were going to fall below $50,000 this year, even I was a little sceptical that it would happen.

I should've trusted myself more - in the very first COE bidding exercise of the New Year, Category A premiums dropped sharply to $45,002. It's the first time since mid-2011 since COE prices cost less than $50,000.

No, seriously. I can't predict the future. The reason I could predict COE prices were going to drop this year was because of a combination of factors.

If you don't understand how COE works, it's basically a piece of paper that inflates the price of vehicles in Singapore. The COE price is determined twice a month by a complicated bidding exercise. The price is based on a quota of COEs that are made available during these bidding exercises. COE prices rise when the demand for COE is high, or when the supply or quota is limited, or both.

So why did COE prices fall in the first bidding exercise of 2016?

The most obvious indicator is that the COE quota remains high. Since August last year, each bidding exercise has consistently seen more than 1,600 Category A COEs being released. This is the highest quota since early 2009. As a result, Category A COE prices have remained below $60,000. What's more, the smart money's on the COE quota remaining high this year, which means we can expect the COE prices to continue dropping.

How can we be so sure about this?

Vehicles in Singapore are expected to be de-registered after 10 years of use. Though you do have the option of renewing your COE after 10 years most car buyers usually take the opportunity to get a new one.

So when we look at the history of COE, we can see a trend - quota numbers tend to follow a repeatable pattern every 10 years.

So what was the COE like 10 years ago?

The Category A COE price on January 1, 2006 was $10,602. Just as a disclaimer, we need to point out that we don't expect COE prices to ever be this low ever again. However, what needs to be pointed out is that prices were already dropping steadily from the high of $28,798 in June 2004. Yes, $28,798 was HIGH 10 years ago. The downward trend actually stopped during 2006, with Category A COE prices fluctuating between $8,000 and $13,000 during that time.

At the same time, the COE quota was steadily rising, and 2006 was right in the middle of the peak, when over 2,800 Category A COEs were up for grabs each exercise. What is also interesting to note is that there is a period of time between 2004 and 2007 when the COE quota during a bidding exercise would only change every 6 months.

The consistency of the low prices and increased supply encouraged car buyers, with more than 5,000 Category A COE bids coming in during multiple bidding exercises. That said, even with almost 6,000 bids in that particular 1 January 2006 exercise, COE prices still remained low. The demand did not really cause the COE prices to rise, but it definitely prevented it from dropping too much lower.

What similarities can we see with the way things are today?

The current Category A COE price of $45,002 is the ongoing continuation of a downward trend of COE prices from a peak of $92,100 on Jan 9, 2013. At the same time, we're seeing relatively high quotas of more than 1,600 Category A COEs released each bidding exercise since August last year. That said, we should point out that if the trend of 2006 is any indicator, where COE quotas changed every 6 months, the COE quota may change next month.

We can't say for sure if the quota will be higher or lower next month, but generally, we should be able to see quotas remain high as more and more cars reach their 10th birthday and get de-registered over the next 2 years.

How are COE prices in 2016 going to be different from 2006?

Just because the COE quotas remain high doesn't mean that COE prices will continue to fall. Several regulations have come into place over the past several years that have made it more inconvenient to purchase a car.

For example, new car loan measures introduced in 2013 meant that you needed to cough up 40 per cent to 50 per cent of the purchase price as a downpayment, and your car loan couldn't last more than 5 years. So if you either didn't have the cash on hand, or couldn't afford the higher loan repayment amount, then you had to be prepared to be at the mercy of train breakdowns.

In addition, with the newly-introduced Total Debt Servicing Ratio taking into account all your outstanding loans, including car loans, one would think twice about buying a car, just in case it affected their application for a housing loan. If you're planning to buy a home, even a $9,000 drop in COE prices won't make much of a difference to your TDSR.

So COE prices are probably going to go lower this year, right?

When there's higher supply and relatively lower demand, any student of economics knows that this means prices are probably going to continue going down. In fact, car dealers know this, and have slashed prices by as much as $12,000 in order to keep demand high and move stock.

They're also throwing in freebies like free servicing, petrol and insurance subsidies. If they keep demand high, they may even reverse the drop in COE prices temporarily.

In other words, the smart thing to do is to wait to see if this current drop in COE prices can be sustained. Resist the urge to get caught up with the freebies being offered by car dealers. But if you really like what they're offering, then get your dream car now. But don't take my word for it. I'm not a fortune teller.

This article first appeared on MoneySmart


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