COE prices are headed up. Oh boy are they headed up; the only way we could see something higher this year is if NASA glues a rocket to a falcon’s ass. But what about LTA’s relief measures? Aren’t they trying to restrain prices? Sure they are, and it’s sad: So far the LTA looks like a nine year old trying to arm-lock a gorilla. In this article, I look at why COEs are set to lunge again:
At Last Count…
The most recent COE exercise ended with prices on an up trend. To summarize:
- Open Category COEs up from $84,389 to $86,999
- Category A (small cars) up from $59,004 to $59,421
- Category B (big cars) down from $85,400 to $82,289
This is despite measures being drawn by the LTA, such as deferring the clawback of ’08 – ’09 COEs. But what’s making the buy force behave like a coked-up Superman? The reasons go beyond bidding. We need to realize that…
1. Deferring the Problem Might Intensify It
The car quota is set to drop, down to 0.5%. As the available quota of COEs shrinks, bidding gets more aggressive, and prices go higher. Simple supply and demand.
LTA’s solution? Defer the drop. Instead of taking place this August, the reduced quota will be implemented in February. Likewise, the clawback of excess COEs (from ’08-’09) is deferred to next year.
If you’ve lived in Singapore for at least five years, you understand our mentality. Based on our national character, which of the following is more probable:
(A) More COEs float around for now, causing price moderation
(B) Kiasu Singaporeans accelerate their buys, because they think prices will be worse next year. This prompts bidding so aggressive, it should legally count as a fist fight.
If your answer is (A), I hope you’ll move back from Canada some day. You’ve been gone too long.
2. Financing is Too Easy
It’s easy to get a car loan that finances 90 – 100% of the quantum. I don’t even understand how that’s possible.
I’m not a credit officer, but isn’t the concept behind a secured loan that the collateral’s worth more than the loan? Considering car depreciation rates, won’t repossessing a financial idiot’s car cause the bank to lose money?
I don’t know how it works; but I’ll tell you one thing: If I hear about a sub-prime car loan crisis, I will flip.
Anyway, combine this with point 1. Singaporeans get worked up about finding a good deal; then they walk past a bank saying “You can buy that car on pure credit, right now.” When it comes to explosive price increase, this is like juggling lit Molotovs in an oil well.
The easy financing facilitates the urgent rush for COEs.
3. Buyers From 2003 – 2004 Not Scrapping
We have a PARF rebate for people who scrap early. This is based on the following formula:
(COE paid) x (Number of months unused) / 120 months
Now, let’s say I bought my car in 2004, when the average COE was about $27,000. What would be my big reward for scrapping?
$27,000 x 24 (two years unused) / 120 = $5400*
*Unused days are also factored into the calculation, but these are removed to simplify the example. Usually, you will get figures like 24.6 months unused.
This rebate is less encouraging than a MOE assessment. The buyers from ’03-’04 are going to cling to the end, which keeps the car quota tight. God forbid that LTA should spend money and give bigger rebates.
4. Category B Will Rally
It’s not all that bad. Category B is dropping significantly, and big cars will be cheaper.
Hold on, there’s a pain in my side; I over-strained the last optimistic muscle in my body. Because no, category B prices will not stay low or keep dropping. They will rally, and with a fury.
Two reasons for this:
First, some Singaporeans will spot the narrowing gap between category A and B. If both will result in 10 year car loans, and category B is closing with category A, why not buy a bigger car? The price difference is more than justified. This will cause a stampede for category B COEs.
Second, LTA wants to shrink the number of Open category COEs. Right now, 25% of the available COEs are Open. By February, this will be reduced to 15%. The problem is, Open COEs are often used for big luxury cars. That’s what category B is also meant for.
When Open COEs drop in availability, more luxury car buyers grab category B COEs instead. And generally, you don’t want to be in a bidding war with someone who can afford an Aston Martin.
5. Transport Infrastructure Issues
More Singaporeans insist on getting a car, despite the cost. That sort of pent up buying force is driving prices through the roof. And why?
My neighbour, who recently caved and bought a car, puts it well:
“The MRT and buses are more crowded every day. Every morning and evening, I fancy I cannot even breathe. Why do you think so many fights are starting over bus and MRT seats? Tempers are flaring because it’s too crowded.
When my wife starts working again, I don’t want her to go through that. When my children grow up, I also don’t want to put them in that situation. Singapore is too crowded, yet every year the population grows. I don’t think our transport infrastructure can take it.
I really think the situation is encouraging us to drive, not to take public transport.”
What should we do to moderate COE prices? Comment and let us know!