COE and Car Prices

[Musicwhiz]

It's official! In order to buy a car you need to give up nearly 2.5 years of yours salary, as the median salary is probably just S$2,700 per month in Singapore!

Dec 9, 2010
COE prices soar ahead of quota squeeze
Increases in premiums are the biggest in more than 10 yearsBy Christopher Tan, Senior Correspondent

CERTIFICATE of entitlement (COE) premiums for cars shot up in the latest tender yesterday.

The bidding frenzy was sparked by fears that quotas would be slashed in February to a 20-year low.

The premiums chalked up their single-biggest increases in more than a decade, with rates for bigger cars rising by more than 30 per cent.

The COE premium for cars of up to 1,600cc ended at $47,604 - $8,604 or 22.1 per cent higher than its rate at the last tender three weeks ago. The premium for cars above 1,600cc soared by 30.5 per cent to $62,502, from $47,890 previously.

For Open COEs, which can be used for any vehicle type but end up being used mainly for bigger cars, the premium was 30.1 per cent or $15,010 higher at $64,900.

The prices are among the highest since the vehicle quota system started in 1990. The last time premiums were this high was back in the 1990s.

In 1994, they breached $100,000 on two occasions because of rampant speculation. After anti-speculation measures were introduced, premiums softened but still hovered between $50,000 and $75,000 from 1995 to 1999 on the back of a meagre supply of certificates.

'The results are unexpected,' said Mr Vincent Ng, product manager at Honda agent Kah Motor. 'We expected prices to go up, but not by this amount.'

Mr Leon Gumpert, Volkswagen Singapore's general manager of sales, agreeding, saying: 'It's a real shocker.'

Market watchers attributed the spike to aggressive bidding fuelled by expectations of a smaller quota in the new year.

Based on estimates, next year's quota starting from February will shrink by about 20 per cent to fewer than 40,000 COEs, making it the smallest supply ever.

So far, the smallest quota was in 1996 when 40,710 certificates were released.

Motor traders were at a loss when asked how they will adjust prices after yesterday's results. Mr Chan Kee Min, senior manager at Cycle & Carriage Kia, said: 'We're still figuring out what to do.'

Mr Gumpert said prices will have to be adjusted 'at least according to the COE increases, if not more'.

At Toyota agent Borneo Motors, prices of smaller cars have been jacked up by $8,000 and bigger models by $15,000 - more or less in line with the premium increases. These would bring the price of a Toyota Corolla Altis 1.6 to $97,488 and that of a Camry 2.0 to $138,488, about $30,000 to $40,000 more than what they cost at the same time last year.

Industry players do not see prices coming down in the near term. Mr Chan said yesterday's results are 'sustainable'.

'Some of the premium brands have margins to bid even higher,' he said, adding he foresees luxury marques making up at least 50 per cent of sales next year, up from around 35 per cent this year, and from less than 20 per cent five years ago.

Mr Gumpert said: 'The consumer sentiment out there is quite strong with regard to the economy. I don't see prices coming off much.'

Traders noted there were many unsuccessful bids yesterday. This 'backlog' will go into the next tender in two weeks' time.

Meanwhile, the commercial vehicle COE premium crept up by 2.6 per cent to $32,001. The motorcycle premium rose by 13.2 per cent to $1,701.

christan@sph.com.sg

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Notice the "coincidence" - the last time COE prices were at record highs (in 1997), the property market was also at its peak!

Business Times - 09 Dec 2010

Car COE premiums shoot to 13-year highs

Demand boosted by impending cut in next quota for Feb-July 2011

By SAMUEL EE

(SINGAPORE) Frenzied bidding seemed to characterise the mood during yesterday's COE tender as passenger car premiums soared to levels not seen since early 1997.

Even before 3pm, Category A, for cars below 1,600cc, and Cat B, for cars above 1,600cc, were already close to $44,000 and $52,000 respectively. Normally, bids remain at the minimum $1 level and action would begin slowly in the last half-hour of the bidding exercise, which ends at 4pm. Cat E, the open category, followed closely, racing to $54,000 by 3.25pm. At that point in time, the prevailing bids for Cat C, for goods vehicles, and Cat D, for motorcycles, were still at $1.

The reason for the scramble is the impending reduction in the next COE quota for February to July 2011, which should be announced next month.

The number of certificates of entitlement (COEs) for the current quota period has already been markedly cut. But the next COE quota is expected to be even smaller because of the general downtrend in vehicle de-registrations, which have been falling for Cat A and B cars since March this year when COE premiums began to spike upwards.

The amount of new COEs released is determined mainly by the number of de-registrations in the preceding six-month period.

Yesterday, Cat A closed at $47,604, up $8,604, while Cat B was $62,502, or a stunning $14,612 higher, and Cat E surged $15,010 to $64,900. Cat C climbed $799 to $32,001, while Cat D rose $199 to $1,701. Market leader Borneo Motors Singapore said yesterday it will raise the prices of its Cat A models by $8,000 and Cat B by $15,000 in line with the COE increases.

The last time the equivalent passenger car COE premiums were higher was in early 1997, at the peak of the property market.

'We are shocked,' said the head of a small mass-market dealership. 'We didn't expect premiums to jump up so fast. We thought we would only see $60,000 next year.'

The sales director of a Japanese dealership said the number of bids received showed there is 'real demand'. There were 1.7 bids for each of the 598 Cat A COEs available, while Cat B and E received more than double the bids for each COE offered.

'Consumers are buying because the market is aware that the COE quota is shrinking,' said the sales director. 'The number of bids clearly reflect this situation. But they are also being encouraged because of the festive season and the good bonuses.'

But the strengthening consumer demand isn't good news for all dealers, some of whom have seen their margins erode or completely disappear.

'These are very tough times,' said one senior executive in resignation.

[dydx]

The major high-end car dealers are the main culprits here. They have been pushing hard to secure more new car bookings during this festive period, and now the cars have arrived and due for registration and delivery, and they have to scramble for COEs at a time when the total number has been cut.

Such a sharp rise in COE prices and such high COE prices are going to be disruptive to the bigger used car market -
1. 2nd-hand car dealers get a chance to make some extra profits in the short term on those cars in their current inventory - that's provided if they can find buyers for them.
2. Many prospective buyers of used cars will be at a loss - to buy now or postpone the purchase?; to downgrade to a smaller or cheaper car?; to put up more money (taken from savings) or to borrow more to pay for the purchase?
3. Car financiers will be taking on a bigger risk - as most car buyers will need to borrow a bigger loan quantum or on a longer term now; the market value of cars as the financiers' collateral will have a higher degree of price volatility risk; and potential loss on the new car loans written at the current higher COE prices may become a problem if and when COE prices have a sharp correction in the future.

It seems the only winner is LTA - the master behind the clever COE Scheme used as a tool to govern and interfere with the free market as well as bringing in an enormous amount of tax revenue - mostly financed by the banking system.

[yeokiwi]

The government should implement de-registration of the cars at the prevailing COE price rather than the paid COE price of the car.

I suppose many car owners are more than willing to give up their 1 to 2 years old car for a proper compensation.

Eg. I bought my Picanto 2 years ago at 10k COE. Now the COE is at 47k and if I choose to de-register my car, I should be compensated with 80% of 47k or $37.6k and whatever PARF or ARF.

However, the car must be first hand and the owner must not buy any vehicle for the next two years to prevent owners from doing trading of a small vehicles for a big one.

[Ben]

Its cycle and I believe history will repeat itself again. COE was this high in the 1990s, and then dropped all the way to as low as $5K in the early 2000s, and now back up again. According to a report, we will see the next round of mass deregistration of cars in about two to three years time. That is when those who bought their cars in between 2005 to 2009 will start to deregister their car for new one, and during those years there were many buyers as COE was cheap then. When more cars are being taken out from the road, the supply of COE will increase, and COE prices will drop. By then, people who buy now will not hesitate to trade in their car for a new car as it is more worthwile for them to do so. This will further increase the supply of COE and lead to further decline of COE prices.

I can't be sure if this scenario will pan out like that, but I am sure I will not join in this frenzy to buy a car even if I can afford it. It simply makes no sense to me to pay $60K for a piece of paper.

[dydx]

It simply makes no sense to me to pay $60K for a piece of paper.

Especially where most buyers of new cars have to borrow a big chunk of the total purchses price (inclusive the COE price) - i.e. they are borrowing money from financiers to pay an enormous amount up-front taxes (COE, ARF, import duties) for a consumption item at very high or inflated prices.

Very few countries in the world have such an unhealthy national or government financing phenomenon, especially where many are young people who do not fully understand the risks of borrowing a large sum of money.

[yeokiwi]

I think the 30% downpayment with 70% loan must be brought back again to stop people from overborrowing.
At least, the car is not in negative equity immediately after the purchase.

0% downpayment is ridiculous.

[dydx]

0% downpayment is ridiculous.

Is this the current market standard or practice by financiers of new car purchasers? If so, it is really ridiculous!

How about the loan tenure? Is the current market practice still 10 years maximum, which was aggressively promoted by the banks (including Citibank) some years back? If so, it is totally ridiculous if a young buyer - earning a only decent monthly salary, but without large cash savings - of a new car at the current inflated prices can borrow 100% of the purchase price, with repayment stretched over 10 years!!

[yeokiwi]

0% downpayment is ridiculous.

Is this the current market standard or practice by financiers of new car purchasers? If so, it is really ridiculous!

How about the loan tenure? Is the current market practice still 10 years maximum, which was aggressively promoted by the banks (including Citibank) some years back? If so, it is totally ridiculous if a young buyer - earning a only decent monthly salary, but without large cash savings - of a new car at the current inflated prices can borrow 100% of the purchase price, with repayment stretched over 10 years!!

0% downpayment with up to 10 years loan is possible.

Look at the link below from one of the distributors...
http://www.sts.com.sg/fi_hp_rate.php

I think the gov is pretty irresponsible by allowing max ten years loan with 0% downpayment.
That is probably the reason why so many mercs and bmws are zooming around Singapore streets.

[dydx]

I think the gov is pretty irresponsible by allowing max ten years loan with 0% downpayment.
That is probably the reason why so many mercs and bmws are zooming around Singapore streets.

I like to believe that inherent to this 'non-interference' by the government is their desire to have more tax revenue from the COEs issued, while leaving it to the free markets - including the car financing market and the banks, supporting the new car market where the car dealers and buyers interact - to determine and stretch the upper limits for COE prices and for financing risks and costs, buyers of new cars are willing to bear.

The end-result of this is that there will be some buyers of new cars who have over-borrowed, or later suffer a loss of income and loan-servicing ability, end up having to forgo their cars or even suffer under financial troubles. Such sad stories would also extend to buyers of used cars, as prices - and financial risks - of used cars follow the rise of COE prices.

Just never forget that we are living in a high price risk market economy! And even though we have paid all the various types of taxes (including COE), don't expect a bailout from our government if we screw up in our financial affairs!

[Musicwhiz]

Good discussions, thanks.

From my understanding, the $0 down-payment scheme is still valid and active as I see it being advertised during some car road shows. It's quite irresponsible of the salespeople to push such deals especially to young couples or men who have barely worked for many years.

And I think the system to extend the loan period from 7 years to 10 years is also silly, as it will just get more people indebted and increase their financing costs!

Then again, it seems this is all Uniquely Singapore!