- Published: Thursday, 23 June 2016 23:42
Are COE prices higher than they ought to be now, or had they been lower than their rightful level before this?
SINGAPORE — By now you know what’s happened. The powers-that-be made borrowing easier for car buyers, showrooms filled up, and prices for Certificates Of Entitlement (COEs) responded by jumping. It’s what happened next that’s the more worrying thing: Prices stayed high.
For every COE category under the sun, the market closed higher this week.
Prices for the Category A certificate (for cars with engines smaller than 1.6 litres and less powerful than 130hp) ended up at $55,200 — $1,506 more than the fortnight before, and at a fresh high for 2016.
As for the Category B COE (for cars with more than 130hp or 1.6 litres under the bonnet), its price climbed $1,010 to $57,010 — a fresh high for 2016.
The Category E certificate became more expensive by $2,290, and finished up at $57,390 — a fresh high for 2016.
Sudden jumps (or crashes) in COE prices are commonplace after a dramatic change in the regulations that affect the car market, so the more relevant question is whether June’s expensive COEs are blips, or the new normal.
“I actually think prices will come down again in two weeks’ time,” says a manager in charge of financing at one multi-brand dealership we spoke to. Sure, prices are high now, she says, but they are only a result of strong pent-up demand that was suddenly unbottled by the new loan regulations.
Just to recap, those regulations now allow buyers to put down as little as 30 percent of a car’s price for a downpayment, and pay the rest over seven years. It used to be at least 40 percent, and five years.
But after an initial rush of buying, the market seems to have calmed down again. “Actually, things have been a bit quiet lately,” says the managing director of a smaller dealership.
All that points to the possibility that the flurry of buying unleashed by the new loan regulations was enough to send prices higher for the entire month of June, but not much further than that.
If so, there’s hope that prices will ease again in time. Indeed, it seems likely, for showrooms now simply aren’t as crowded as they were in early June.
That’s the optimist’s view.
The darker view is that, if X people were able to buy a car under the tighter loan regulations, then the number of folks who can now afford one is surely greater than X. The presence of all these extra people has surely resulted in a permanently raised level of demand for new cars.
Put another way, the COE game has always been a matter of demand and supply. The supply side we know about, but what has happened now to demand? The economist's answer is simple: since demand is made up of both willingness and ability to buy, we should assume that it’s gone up. The “ability” part has just been strengthened by the easier loans, after all.
That suggests that the $55,000 to $57,000 level seen this week is going to be our new normal for COEs, alas.
There is a third thing way to look at the picture, and it involves some quick calculations that show how today’s COE prices are pretty much where they are intended to be.
Every month there are roughly 800 motorcycle COEs up for grabs, and let’s say they fetch $6,500 on average. That means they’ll put around $62.4 million into Government coffers every year.
The significance of that? Peruse the Government’s Budget for 2016 and you’ll find this line: “Vehicle Quota Premiums are estimated to increase by $0.2 billion (or 4.6%) to $5.7 billion in FY2016.”
The actual projected figure is $5.65 billion — subtract the revenue from motorcycle COEs and you’re left with $5.59 billion left to raise. Between all the COEs for cars and trucks, there should be roughly 95,000 available this year. Call it 100,000 COEs, for simplicity’s sake.
Now ask yourself this: For 100,000 COEs to raise $5.59 billion, how much would each one have to cost on average?