Drop in COE premiums may see car buyers rushing in and pushing prices back up, say analysts

SINGAPORE: After a decline in Certificate of Entitlement (COE) prices for cars at the last bidding exercise, buyers may rush in and push prices back up, analysts said on Thursday (May 18).

As the COE supply remains low, small increases in demand can have an outsized effect, one analyst added.

On Wednesday, premiums for smaller cars in Category A closed at S$92,000 (US$68,410), down from S$101,001 in the previous exercise. 

Category B prices for larger and more powerful cars fell to S$113,034 from S$119,399.

This was the first bidding exercise since the government announced that quotas would increase for the two categories.

But outside of Category A and B – which are what most car buyers opt for – premiums for other COE categories rose.

Open category COEs, which can be used for any vehicle type but end up being used mainly for large cars, rose to a record S$125,000. Commercial vehicle COEs increased to S$77,501 from S$75,589.

Motorcycle premiums nearly doubled, to S$10,602. This came after prices plunged to S$5,002 in the previous bidding exercise following an increase in the bid deposit and a reduction in the validity period of temporary COEs for bikes.

SMALL INCREASE IN DEMAND WILL HAVE BIG IMPACT

“What happens in the car market is that when COE prices fall, the cost of buying a car falls, which draws in more buyers off the sidelines,” said Associate Professor Walter Theseira, who teaches economics at the Singapore University of Social Sciences.

“Essentially, buyers always come in to fill any increases in supply, and when this new demand makes its way into bids, COE prices rise again,” he said, adding that he expects prices to stabilise at best.

“You're already seeing dealers revise their package prices downwards for Category A cars, which will bring in more buyers and hence reduce the tendency for prices to drop further – they will likely rise again if there's a good market response to the price reductions,” he said.

Mr Raymond Tang, market analyst at Yong Lee Seng Motor, said car dealers may have received more orders after the first exercise in May, where COE premiums fell slightly.

“This time round, again, maybe they might collect more orders again, end up it will be even more,” he said.

The small supply of COEs also means that a small increase in demand can end up having a relatively big impact on prices.

“You don’t need a lot of people to push the COE to go up, a small number of people will push it up already,” he added.

The supply of new COEs is limited by the number of deregistrations, which usually happens 10 years after registration. The number of cars registered 10 years ago was low, and that affects COE supply now.

While analysts said the quota increase helped, they cautioned that premiums are unlikely to go on a downward trend.

“There’s going to be more ups and downs,” said Mr Arthur Wong, director of ACM Automobiles.

“For those who feel that it will keep coming down, I think they better get prepared that it’s not going to be that way, they need to manage their expectations,” he said.

The expected increase in demand “means that you usually can't expect the fall to be sustained or to continue further unless there are further substantial increases in COE supply, which is not likely for the next few quarters,” said Assoc Prof Theseira.

OPEN CATEGORY RECORD HIGH

Analysts said COE prices for the Open category, or Category E, are usually closer to Category B premiums, and Mr Wong said the divergence was somewhat surprising.

“It should be closer,” he said. “I think most people were pretty shocked.”

Category B’s COE price was S$11,966 lower than Category E’s premium in the exercise that ended on Wednesday. In the previous round, the difference was S$4,603.

Assoc Prof Theseira noted that Open category COE prices are based partially on market speculation because they can be transferred once if the first buyer is an individual and not a company.

“If COE prices for Category B rise in the meantime, then an existing unused Open category COE increases in market value, which could gain the owner of that COE a profit.

“Thus, the increase in Open category COEs likely reflects market speculation that the price of Category B premiums will rise still further over the next few months,” he explained.

Mr Tang of Yong Lee Seng Motor said dealers may have used up their Open category COEs and want to keep some stock on hand so that buyers who want to register a car immediately have the option of doing so.

He also pointed to the government’s announcement of revised additional registration fees (ARF) and cap on rebates for luxury car buyers in February.

The new structure only applies to COEs obtained after the announcement.

The older COEs that were not subject to the higher ARF were snapped up, and fewer people bid for Open category certificates in the meantime, Mr Tang said. This round, 301 bids were received, compared with 271 in the previous exercise and 252 each in both April tenders.

He said Category B prices are likely to catch up to Category E premiums eventually since they are used for similar vehicles.

“Normally, (Category) B and Open are very near,” he said.