Can former 5-year extensions save us from soaring COE prices in 2022?

Nov 09, 2021

IF you have only just recently entertained the thought of buying a new car, look away now. Last week's Certificate Of Entitlement (COE) auction saw premiums rise further from already sky-high levels after the supply of certificates shrank.

The Category A COE, for cars with less than 1.6 litres or 130 horsepower under the bonnet, climbed in price to S$53,709, an amount not seen since June 2016.

Meanwhile, the Category B COE (for cars with more than 1.6 litres or 130 hp in the engine bay) landed on S$82,801 when the auction was over.

The Category E certificate, which can be used for either kind of car but is exclusively deployed to put Category B cars on the road, ended up at S$88,000. One would have to go back all the way to 2013 to find prices like that.

What happens next? By and large, Singapore's COE market tends to move in 10-year cycles, so forming an outlook for 2022 doesn't exactly require skill at reading tea leaves, instead it entails a look at what happened a decade ago.

In a nutshell, COE prices are set by demand and supply, not by the government (unless you ask conspiracy theorists), so predicting prices comes down to assessing both of those market forces.

The supply side is easy. The Land Transport Authority (LTA) decides how many new cars it wants the industry to put on the roads, sets the corresponding number of COEs every 3 months (the "quota"), then sits back with popcorn and watches as car buyers fight over the precious certificates, wielding chequebooks as their main weapon.

The quota follows a one-in-one-out policy, so a fresh new COE is only created whenever an existing car is deregistered and scrapped or re-exported. Since COEs have a 10-year validity to begin with, cars here tend to be deregistered when they reach that age.

The demand side is tougher to put a finger on, but generally reflects overall consumer sentiment, with the occasional distorting factor to keep things interesting. Half a decade ago, it was ride-hailing companies keeping demand (and thus prices) inordinately high.

Where does that leave 2022? The scary news is that we are in for a tight supply. LTA figures show that there are only around 14,000 cars on the road between the ages of 9 and 10.

Even if every single one is deregistered over the next year, that will only create room for a tiny quota - fewer than 1,200 cars a month, or half the number available at the moment.

But as it turns out, more cars than that are waiting to be scrapped. Four years ago, more than 21,000 people pondered what to do about their own cars with soon-to-expire COEs, and decided to cough up only enough to extend them for 5 years.

Doing so meant that they paid half the usual amount for renewing a COE, but also meant that those cars would have to be deregistered at the end of the 5 years, come what may.

Thanks to this group, there are an extra 21,000 cars destined for that great carpark in the sky next year, so 2022's quota could be as large as 35,000, or just shy of 1,460 for every COE tender exercise.

That is actually more than the sum of Category A, B and E certificates that went on auction last week, when buyers competed for only 1,282 of them.

A larger quota would ease pressure on prices, but some in the car trade are cautiously pessimistic, so to speak.

"It is still too early to predict how the quota will change in the coming year," says Jasmmine Wong, the CEO of Inchcape Greater China and Singapore at Borneo Motors and Inchcape Automotive Services. "Based on our observations, we don't see an upswing in the number of COEs being issued any time soon."

Wong, who runs the authorised dealerships for Lexus, Toyota and Suzuki cars here, likely controls a tenth of the car market, so she knows what she is talking about.

Like other car dealers, she would probably be happy just to see the COE quota remain the size it is. It is telling, however, that she is pushing Inchcape hard to diversify its income streams.

This year, it launched an expanded used car business, set up a car-sharing service and stepped up its efforts to push corporate leasing.

"For car owners or those who see car ownership as a necessity, my recommendation to them would be to purchase a COE now, as it's unlikely for the prices to decrease in time. For everyone else, there are multiple options still available and worth exploring," she says.

The idea that prices will stay lofty next year might be down to a belief taking hold within the car trade that Tesla is going to propel the car market like one of Elon Musk's SpaceX rockets.

There may be something to the idea that electric vehicle and clean air incentives, which can lop S$45,000 off a given car's tax bill, simply leaves buyers with more money for COEs.

That stands to reason. Imagine cars are burger patties and COEs are the bun. Suppose the market sets a price of S$10 for the entire burger.

Then, in an effort to get people to make healthier choices, the government creates incentives that cut the price of veggie patties significantly.

What likely happens is that aggregate burger prices stay around S$10, but people end up paying more for the bun part than before.

But these incentives apply to all electric car brands, not just Tesla, so there is likely some scapegoating of the new kid in town here.

Tesla might simply be taking some heat because it prices its cars without COEs, so is free to bid whatever it wants and send the bill to its customers.

Yet, the car industry is generally cautious about COE bidding. Prices shot up in October's second COE auction, but LTA numbers reveal that nearly 95 per cent of the winning bids for Category A were within 5 per cent of the closing price.

In the Category B corner (where Tesla is active), around 86 per cent of the winning bids were within 5 per cent of the eventual S$80,201 price.

No one had bid more than 10 per cent above that, so it's not as if there are cavalier players in the car trade raising their paddles and shouting ludicrous numbers at the auctioneer.

But whatever happens next year, prices seem unlikely to ease from current levels, barring some sort of event that devastates demand, such as an economic crisis. And no one wants that.

The brighter news is that the same factors causing a tight COE supply will bring about a bigger quota after 2023.

Some 38,000 cars are presently between 6 and 7 years old, and if most of them are deregistered at age 10, 2024 should be a year of plenty. More than 78,000 cars are now between 5 and 6 years old.

That leaves people on the hunt for a new car next year with 2 clear options. If they can afford to buy, then do so. But if they can afford to wait, then they should.