COES WILL BE­COME 25% CHEAPER – HOW WE KNOW

Look­ing at the fac­tors that are likely to in­flu­ence COE pre­mi­ums in the next two years.

Torque (Singapore) - - FRONT PAGE - CONSULTING EDITOR CHRISTO­PHER TAN

CERTIFICATE of en­ti­tle­ment (COE) prices have fallen from more than $90,000 five years ago to just be­low $50,000 in re­cent months. They seem to have reached an equi­lib­rium of sorts, but which direction are they headed in the next cou­ple of years?

To an­swer this ques­tion, we must ex­am­ine the var­i­ous fac­tors that are likely to in­flu­ence price move­ments. And there are many.

Firstly, sup­ply. The COE quota cy­cle has passed its tra­di­tional peak. From next year, sup­ply will start to shrink.

But un­like pre­vi­ous cy­cles, the con­trac­tion this time will be less dras­tic. It will be a gen­tler curve, be­cause of the COE reval­i­da­tion trend. Since 2015, more than 50,000 car own­ers have ex­tended the life­span of their cars by reval­i­dat­ing the COE. By the end of this year, the num­ber could hit 70,000.

This in ef­fect has slowed down the rate of dereg­is­tra­tion. Since the ma­jor­ity of COE reval­i­da­tions were for a five-year ex­ten­sion, cars which were sup­posed to have been scrapped in 2015, 2016 and 2017 will now be scrapped in 2020-22.

Sup­ply will still shrink, but the shrink­age will not be sig­nif­i­cant. Let’s as­sume this will put a 10-20% up­ward pres­sure on COE pre­mi­ums.

The next fac­tor to ex­am­ine is bid­ding power. Come Jan­uary 2018, the new Ve­hic­u­lar Emis­sions Scheme (VES) will erode the profit mar­gins of sev­eral car models.

This is be­cause the VES is far more strin­gent than the cur­rent Car­bon Emis­sions­based Ve­hi­cle Scheme (CEVS). Many cars which en­joy a tax re­bate of up to $30,000 to­day are likely to see this re­bate slashed – or com­pletely taken away. Many which are in the Neu­tral band will be sub­jected to tax sur­charges of up to $20,000.

In short, th­ese cars will be­come costlier. But to re­main com­pet­i­tive and at­trac­tive, deal­ers are un­likely to pass the cost in­crease en­tirely to the con­sumer.

Hence they will sac­ri­fice profit mar­gin. And a thin­ner profit mar­gin of­ten trans­lates to di­min­ished bid­ding power. Un­til such a time when the mar­ket is fully ad­justed to the new VES, this fac­tor will sup­press COE pre­mi­ums, per­haps by 20-25%.

Par­al­lel im­porters are likely to find the go­ing tougher in the com­ing years. Many are al­ready in dan­ger of not be­ing able to clear ve­hi­cle stocks that might not meet the Euro 6 emis­sion stan­dard that kicks in on Septem­ber 1.

They are likely to find it tougher to ob­tain cer­ti­fi­ca­tion for VES, which re­quires the mea­sure­ment of five pol­lu­tants.

There is no doubt that par­al­lel im­porters – known for their re­source­ful­ness – will even­tu­ally over­come this hitch. But for the first year at least, their par­tic­i­pa­tion in COE bid­ding

will be ham­pered. This could de­press pre­mi­ums by 5-10%. We need to look at the de­mand side next. It is likely buy­ers will rush to reg­is­ter a car be­fore Jan­uary 2018, so as to en­joy the gen­er­ous CEVS and to avoid the VES.

Like­wise, sell­ers are also likely to launch pro­mo­tions to clear models which are less com­pet­i­tive un­der VES.

This will lead to a flurry of re­tail ac­tiv­ity in the re­main­ing months of this year. Does that mean COE pre­mi­ums will climb from now till De­cem­ber?

Not nec­es­sar­ily. Pro­mo­tions are likely to be at the ex­pense of profit mar­gin. As men­tioned ear­lier, a thin­ner mar­gin of­ten trans­lates to di­min­ished bid­ding power. But be­cause buy­ers are also likely to rush, maybe the pro­mo­tions need not be as ag­gres­sive.

What­ever the case, a lot more cars will be sold up to De­cem­ber. This might lead to an “over­sold” sit­u­a­tion in the first quar­ter of 2018. This is a sit­u­a­tion where car own­ers who had in­tended to scrap their old cars for a new one did so a few months ear­lier than planned. So come 2018, when the “un­sched­uled scrap­page” trans­lates to fresh COEs, there will be a lower take-up. This “over­sold” sit­u­a­tion could de­press pre­mi­ums by 10-15%. But be­cause of the height­ened re­tail ac­tiv­ity in the re­main­ing months of this year, which may drive pre­mi­ums up by 5-10% (be­cause of thin­ner mar­gins, re­mem­ber?), the ac­tual down­ward pres­sure on COE from cur­rent lev­els may well be just around 5%.

This will eas­ily be negated by the de­mand whipped up by the next Sin­ga­pore Mo­tor­show in Jan­uary. De­mand from pri­vate-hire play­ers such as Uber and Grab has al­ready slowed down con­sid­er­ably. It is likely to slow down fur­ther next year. This should de­press COE pre­mi­ums by 10% or so.

Fi­nally, we have ex­ter­nal fac­tors, the most sig­nif­i­cant of which will be the econ­omy. The next down­turn is long over­due. But it is some­thing that can­not be averted. It will ar­rive. When it will hit, and how hard it will hit, is un­cer­tain. This un­cer­tainty will af­fect con­sumer sen­ti­ment.

This will no doubt sup­press car de­mand, but it is hard to say by how much and over how long a pe­riod.

Will the open­ing of the MRT Down­town Line 3 this Oc­to­ber af­fect de­mand for cars? Again, hard to say. There has been anec­do­tal ev­i­dence to sug­gest ac­ces­si­bil­ity to rail trans­port can re­duce car de­mand. But no em­pir­i­cal study has been done here. So, while we keep in mind th­ese ex­ter­nal fac­tors, we can­not es­ti­mate how much they will af­fect pre­mi­ums. But with all the other “known” fac­tors, we can es­ti­mate that COE pre­mi­ums will fall by 20-25% over the next two years.

So, if you are plan­ning to buy a new car, there is no need to hurry.

Smaller COE quo­tas from 2018 might add thou­sands of dol­lars to COE prices, if not for other fac­tors push­ing pre­mi­ums down­ward in­stead.

The new models to be im­ported next year and the COE bids they re­quire will de­pend heav­ily on the VES-al­tered mar­ket de­mand.

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