Problems Brewing in the COE Market

[Darryn]

There are problems brewing in the COE market - BIG problems that will need to be addressed - just what will happen in the next five years is anyone's guess.

 

Take a look at what is happening with the COE right now, I'll only look at Cat B here to keep things as simple as possible, but to my mind there is a huge buble forming that is going to cause a massive shakeout in the near future that the government is going to have to be very clever to counter.

 

The price at the last round was $95,000 - the conventional wisdom is that it will stay high until around 2014 when the "bumper crop" cars start to come up for deregistrations. What is going to happen when this comes about?

 

Well I think if the COE drops appreciably, there is going to be an issue.

 

First of all, a part of what is driving the current high price is the paucity of deregistrations - there are a whole heap of cars currently on the roads with $10-$30k COEs that will not buy at $50k and above. These people are holding onto their cars for all they're worth.

 

IF, with all the cars coming up the price of the COE drops back to say $15k in 2015. What will happen?

 

Let's take a worked example of a Toyota Wish from Borneo.

 

If I buy today, and sell in AUgust 2015, I will get back $82,625 from PARF and COE. Assuming the (factory) price of the car does not move in that time, and the COE is $15K, I will be able to replace it with a brand new car for only $88,000. Meaning I only need to get $5,300 for the body and I get a brand new car FOR FREE.

 

Who wouldn't do this? I certainly would.

 

So there will be NO used cars sold. It would be a stupid move - the car would have to sell for less than paper value - and who would do that?

 

At the same time - there is going to be a HUGE boom in the ADs - virtually EVERYBODY will be changing cars - there won't be the capacity in the market - this will cause all sorts of management issues, not to mention problems with how many COE to be released, compensating for deregistrations and the like.

 

If the price really does fall dramatically, it's going to deepen the "boom / bust" cycle that is already prevalent. Even if it only drops back to $50,000 after a year or more above $90,000, there is still big big incentives to change car -

 

that $40k difference in COE amounts to a difference of $4k a year in depreciation - which is rather significant in anyone's bank account.

 

So what will the government do? I don't see that they will want this to happen.

 

One way, that might work - set a COE "floor". If not less people bid above the floor than there are COEs - then those COEs are "saved" for future rounds.

 

Another way might be to try and second guess the market and "predict" how many COE to release to keep the price high.

 

What would be interesting, would be to see if there is any analysis on past behaviour when COE drops - just how many cars were deregistered and how much was the difference in quota premium that triggered it (LTA should be able to track this as it will have information on a per car basis that it can aggregate - for us, it is pretty much impossible as we do not have enough information).

 

Any thoughts?

[Steptronic]

In my guess, if 350 to 400 Cat B is good for a better traffic, then it is no brainer to bring it to that level by adjusting the growth to negative. I do not think we can afford to make yet another mistake by allowing all degistrations into live again. Cat B buyers are relatively richer and majority of them would still go for deregistrations. In case of Cat A, they would hold on as long as PQP is within their reach. It is going to be a problem at this point

[Kangadrool]

First of all, the bumper crop may not be fully released.

 

Even if fully released, COE may not drop to such low level again 'cos there are many people now being priced out of the market. Once the COE drops by 30% from current level (still around 60K+ which is high BTW), they will come in. So the demand is there unless we are talking about recession.

[Liping24cn]

Your argument is flawed.

If suddenly the COE crash to $30,000. Say even for two bids cycle, the Cat.B were to be $30,000.

You argued that everyone will scrap their cars and buy new ones to replace.

Yes they would, and AD might have a booming business.

But the beauty of the COE s that it is limited.

If many people suddenly rush in to book cars, the demand will 99% cause the next round of COE price to shoot back upwards very quickly!

 

The quota will not change untill every six months review! You also forget the LTA got many pattern...claw back lah....stabilize the return quota pool lah.

I am very sure, the increased in deregistered car quota will be phased in slowly to avoid a sudden surge in next six months bidding quotas. They may even take the opportunity to declare -3% vehicle growth to reduce the quota further.

 

So because of the likely macro management by LTA. Your worries will NEVER ever happen. I can bet, the cash cow will be very tightly controlled to make every car owners pay n pay forever.

 

[Satrianeo_2012]

Btw, the price may be controller.... you will never know.....

[Donut]

the COE market is exactly the same as our property market; basically the agents are controlling and playing the prices. The garment shld eradicate the system which allows agents to manipulate.

[Jujitsuka]

Aiya Bro you think too much... You still dunno how our gahmen wks meh? Our million dollars ministars will go for the easiest solutions... What u r recommending is too complex OK? They will most prob take a ration of 1:5 for every 5 COE deg registration theygive back 1 or maybe hey will even set the quota higher lor? Dunch complicate things too much bro skali later LTA send you a Tuck Yew letter for being too kapoh hahahaha!

[Darryn]

Your argument is flawed.

If suddenly the COE crash to $30,000. Say even for two bids cycle, the Cat.B were to be $30,000.

You argued that everyone will scrap their cars and buy new ones to replace.

Yes they would, and AD might have a booming business.

But the beauty of the COE s that it is limited.

If many people suddenly rush in to book cars, the demand will 99% cause the next round of COE price to shoot back upwards very quickly!

 

The quota will not change untill every six months review! You also forget the LTA got many pattern...claw back lah....stabilize the return quota pool lah.

I am very sure, the increased in deregistered car quota will be phased in slowly to avoid a sudden surge in next six months bidding quotas. They may even take the opportunity to declare -3% vehicle growth to reduce the quota further.

 

So because of the likely macro management by LTA. Your worries will NEVER ever happen. I can bet, the cash cow will be very tightly controlled to make every car owners pay n pay forever.

 

You say my argument flawed then you say this.

 

This is EXACTLY the point I am making - the "pattern" will have to change or there will be some problems - the boom / bust cycle that is here now will deepen. The management will become more tricky.

 

"clawback" would be a departure from the current policy.

 

I think there will be policy changes to ensure the price stays high. I wouldn't be surprised if we never see COE below $50k again

[Mockngbrd]

As long as it's not a problem to the ruling party. also not the first time COE at these levels. Only difference was last time it happened, can prob. buy HDB for price of COE.

 

So what will the government do? I don't see that they will want this to happen.

They dunch care one la.... Edited August 10, 2012 by Mockngbrd

[Blurblur89]

got money, go buy. no money, stand oneside and smell the exhaust.

 

talk until the balls drop, there will always be Local or foreigners waiting inline to buy the car.

 

with a population of 7million, am sure there will be PLENTY OF TAKERS.

 

 

you dont buy car, there will be foreigners willing to buy from you.

 

 

[Seaweed]

I don't actually get the logic of few years down the road...more car scrap and because of more COE going back into the system... COE price will drop?? Who ever COE reached 10 yrs will probably get another one...so whatever goes back into the system...comes back again to the same person at a new charge (the cost of COE)...so it is mostly a factor of number of the increase rate of car population set out by ah gong vs population increase vs wealth...those that brought high may not be able to change as well...because they are taking very big loan !!! so it is a big negative equity...

[Macrosszero]

It had already happened before -

 

The batch of cars that had very high COE in the previous spike (1998-2002), the owners all happily deregistered their 2-3 year old cars for a new car at the dealerships at little to no cash outlay because of the high paper value (I recall the scrap value, PARF, etc were higher then). Which is why you hardly see any cars from those years on our roads anymore. What triggered it was probably LTA releasing more COEs onto the market, coupled by moving from 130% to 110% ARF which made cars cheaper. It probably started a chain reaction of deregistrations that gained momentum.

 

I'm not sure that in the next 5 years such a situation can re-occur, because back then, there was the 7 year 70% loan rule so no one was overly leveraged. In today's situation, too many marginal car owners are locked into 10 year 100% balloon loan schemes that renders them unable to move along with market fluctuations.

[Joseph22]

There are problems brewing in the COE market - BIG problems that will need to be addressed - just what will happen in the next five years is anyone's guess.

 

Take a look at what is happening with the COE right now, I'll only look at Cat B here to keep things as simple as possible, but to my mind there is a huge buble forming that is going to cause a massive shakeout in the near future that the government is going to have to be very clever to counter.

 

The price at the last round was $95,000 - the conventional wisdom is that it will stay high until around 2014 when the "bumper crop" cars start to come up for deregistrations. What is going to happen when this comes about?

 

Well I think if the COE drops appreciably, there is going to be an issue.

 

First of all, a part of what is driving the current high price is the paucity of deregistrations - there are a whole heap of cars currently on the roads with $10-$30k COEs that will not buy at $50k and above. These people are holding onto their cars for all they're worth.

 

IF, with all the cars coming up the price of the COE drops back to say $15k in 2015. What will happen?

 

Let's take a worked example of a Toyota Wish from Borneo.

 

If I buy today, and sell in AUgust 2015, I will get back $82,625 from PARF and COE. Assuming the (factory) price of the car does not move in that time, and the COE is $15K, I will be able to replace it with a brand new car for only $88,000. Meaning I only need to get $5,300 for the body and I get a brand new car FOR FREE.

 

Who wouldn't do this? I certainly would.

 

So there will be NO used cars sold. It would be a stupid move - the car would have to sell for less than paper value - and who would do that?

 

At the same time - there is going to be a HUGE boom in the ADs - virtually EVERYBODY will be changing cars - there won't be the capacity in the market - this will cause all sorts of management issues, not to mention problems with how many COE to be released, compensating for deregistrations and the like.

 

If the price really does fall dramatically, it's going to deepen the "boom / bust" cycle that is already prevalent. Even if it only drops back to $50,000 after a year or more above $90,000, there is still big big incentives to change car -

 

that $40k difference in COE amounts to a difference of $4k a year in depreciation - which is rather significant in anyone's bank account.

 

So what will the government do? I don't see that they will want this to happen.

 

One way, that might work - set a COE "floor". If not less people bid above the floor than there are COEs - then those COEs are "saved" for future rounds.

 

Another way might be to try and second guess the market and "predict" how many COE to release to keep the price high.

 

What would be interesting, would be to see if there is any analysis on past behaviour when COE drops - just how many cars were deregistered and how much was the difference in quota premium that triggered it (LTA should be able to track this as it will have information on a per car basis that it can aggregate - for us, it is pretty much impossible as we do not have enough information).

 

Any thoughts?

Just scrap the car lor.

 

its not as if we had not gone through this phase where 2nd hand car - market no more business.

[Topspin]

Well I think if the COE drops appreciably, there is going to be an issue.

 

Any thoughts?

 

 

Did it not happen some years back (mid 2000?) That was the time when even 1 or 2 year old cars were scrapped to recover the expensive COE, then buying a new car with dirt cheap COEs? That was also the time when the PARF formula was revised by LTA to "punish" early scrapping of car.

 

I suppose LTA can always tweak the PARF formula again if it happens.

Edited August 10, 2012 by Topspin

[Razgriz]

To break the ice, i think u think too much.. cos by that time, the govt will intervene and throw new rules and regulation to ensure it doesn't happen..

 

like that in 2005, COE is cheap... cheap for few months then comes sky high.. why? cos govt. change rule.. so it is their game to play.. we are just part of the player..

 

but say of which.. hopefully it drops as my current ride 2015 finish COE.. haha

[Mightymito]

got money, go buy. no money, stand oneside and smell the exhaust.

 

talk until the balls drop, there will always be Local or foreigners waiting inline to buy the car.

 

with a population of 7million, am sure there will be PLENTY OF TAKERS.

 

 

you dont buy car, there will be foreigners willing to buy from you.

 

 

No matter what the issue, FT always crop up. Weather hot also FTs fault.

[Poopular]

COE scheme is fine, no further tweaks needed, jus let market force decides the price, and let LTA work on the ideal car population...and government need to focus only on providing first class public transportation and infrastructure, i.e. Reduce traffice congestion...

 

People should jus get used to the inflated car price....jus like rolex watch keep adjusting their price upwards, how come no one complains? Car, unlike housing, is jus a luxury goods...with regards to businesses which require transportation, again, according to usual market practices, the cost will jus be conveniently pass back to consumers, ppl jus need to get used. I remembered recently when taxi driver first hike their fares, ppl are up in arms to protest...see wat happens now? Ppl got used to the high cost and move on....

 

My main grouse is despite the erp gantries, traffic condition is still not improving. If it is not improving, then why bother to put up the gantries in the first place? May as well nip the bud of the problem and set negative growth for vehicles....whether i am driving or taking public transportation, i will like the roads to be smooth...doesnt it promotes higher productivity as a nation as a whole?

 

 

[Watwheels]

You newbie lah Darryn. If you had know the system's history you will know that there are a lot of variables that the LTA can manipulate.

 

In the 90s, the ARF was 160% of the car's OMV, later it was adjusted to 110% and dan to now 100%. If this ARF they can adjust downwards that means they can also adjust it downwards somemore until your car is like worth nothing. Hence when you trade in your car it will be worth nothing and you have to start from square one in terms of payment. See my point?

 

No matter what you can think of they are 3 steps ahead of you. If you want to buy car in sgp they will make sure you pay thru your nose. There will be no good deals waiting for you or me or anybody else. Nevermind lah, you will see the light some day.