News analysis

COE prices down but don’t go rushing to showrooms

Car buyers at the Honda showroom at Leng Kee Road on Jan 10, 2016.
Car buyers at the Honda showroom at Leng Kee Road on Jan 10, 2016.ST PHOTO: KUA CHEE SIONG

Certificate of entitlement (COE) prices have plummeted, with the premium for bigger cars hitting its lowest level in six years.

So, is it time to start looking for a new car now?

If you have been waiting for prices to return to saner levels, then they seem to be doing just that.

 
 

So yes, you can start shopping, but you should be aware of two things.

First, you are unlikely to be able to enjoy prices that fully reflect the Category B (cars above 1,600cc or 130bhp) premium of $38,610. At least, not immediately.

Premiums will most likely rebound in the next tender or two. They will take another round or two to come back down, maybe longer.

Second, premiums are likely to trend downwards in the longer term. This is because the supply of certificates - the biggest determinant of prices - is set to balloon for the rest of the year, as well as the whole of next year.

The Category A COE (for cars up to 1,600cc and 130bhp) price is likely to fall more immediately and sharply. This is because this COE is now $8,000 costlier than the premium for bigger cars - an anomaly.

There is no need for buyers to rush or panic, even if COE prices bounce back up by $10,000 in the next tender.

For those who have been following my columns all these years, this has been my underlying message - do not commit out of fear. Buy at a price that you are comfortable with. More importantly, be prudent - do not stretch your finances.

As you might have noticed, the world economy is a little shaky. That in part has sent oil prices plummeting, which in a tail-wagging-dog way, is having a negative impact on the world economy and employment rate.

In Singapore, the Straits Times Index has lost 500 points since the last quarter; and property prices are likely to reflect this negative sentiment more closely soon.

The COE price for Category B has been tumbling since last November, when it was still hovering above $60,000. Yesterday's price of $38,610 is almost half of that value.

This is because cars in Category B tend to be more discretionary purchases than those in Category A. And in times of uncertainty, big-ticket discretionary purchases are the first to be curtailed.

Owing to these recessionary concerns, the top-selling luxury brands are no longer rolling off the showroom floor as quickly as before. Even though makes like Mercedes-Benz and BMW are still in the top 10 list, the cars they sell will increasingly be Category A models.

There is another reason why you should not rush. Those who bought new cars in the last three years or so are likely to find themselves in a negative equity position.

That is to say, their outstanding loans - on cars bought with COE prices as high as $90,000 - are worth less than the residual value of those vehicles. This will prompt some of them to start scrapping their cars prematurely. This scrappage trend will mean even more fresh COEs in the supply pipeline.

So, once again, start browsing, but take your time.

A version of this article appeared in the print edition of The Straits Times on February 04, 2016, with the headline 'Don't go rushing to showrooms'. Print Edition | Subscribe