Keep calm and carry on driving

News of growing certificate of entitlement (COE) supplies should not come as much of a surprise now.

The quota for COEs to own vehicles is determined every three months and has been expanding for around two years. It is expected to keep on growing for at least two more years.

This is because the bumper crop of cars sold a decade ago are coming of age, and are being deregistered. Fresh COE supplies are determined largely by deregistration numbers.

The real poser is whether COE premiums will fall in tandem.

Naysayers may point to how persistently high prices have been in the first half of this year as an indication that "premiums will never fall". Despite the growth in number of COEs, the amount people paid for them have been hovering between $65,000 and $75,000 - largely unchanged from the previous half-year results.

With a bumper crop of cars sold a decade ago coming of age, the COE quota has been growing for about two years, and is expected to keep on growing for two more years. This is likely to result in lower COE premiums, which have fallen from $90,000 just over two years ago to $60,000 at the last tender. ST FILE PHOTOCaption

Well, premiums should have fallen. They were kept buoyant largely by fear. Firstly, fear that a revised carbon tax scheme would push up prices. Secondly, fear that the Government would implement a zero-growth policy for cars soon.

Those fears proved unfounded. Car prices have remained largely unchanged since the new tax scheme kicked in on July 1. As for zero growth, it is unlikely to happen in the near term.

So, will COE premiums fall? You bet they will. In fact, they have already fallen substantially – from over $90,000 just over two years ago to around $60,000 at the last tender. Will they fall farther? In all likelihood, yes.

Even if zero growth were to happen, the impact would be minimal because the current allowable growth rate is already near zero, at 0.25 per cent.

So, will COE premiums fall?

You bet they will. In fact, they have already fallen substantially - from over $90,000 just over two years ago to around $60,000 at the last tender.

Will they fall farther? In all likelihood, yes. That is, if consumers do not give in to irrational behaviour.

Irrational behaviour would be rushing to buy a car at today's prices despite the fact that there will be more COEs in the pipeline.

And there will be more COEs. The quota for this calendar year is likely to be around 70,000 - close to double last year's. Next year, it should rise to 100,000.

So, why rush? It is one thing if your existing car's COE is near its expiry date, but quite another to storm the showroom as if it were your last chance to buy a car.

And if you are shopping for a new car, strike a forward price - that is, what the price is likely to be three to six months down the road. Some motor traders are already expecting COE prices to fall by 10 per cent in the next three months - that translates to a $6,000 reduction. So that would be a good discount to start with if you are car-shopping now. Whatever you do, do not go for "Guaranteed COE" deals - you just end up paying more. Worse, you are subsidising the non-guaranteed bids.

Authorised agents should wise up to the fact that competition is getting hotter, with a number of parallel importers having gained a level of respectability and consumer trust (quite a few are CaseTrust-accredited now).

If authorised dealers think that by adopting a high-margin strategy and thus a "high COE strategy", they can keep out parallel importers (which typically have lower margins and bidding power), they are mistaken. They will, in fact, chase more customers into the arms of parallel importers.

While demand for cars may have risen with Singapore's growing population and rising income, actual liquidity may at the same time have been dampened by high mortgages and overall inflation.

Also, the current global economic uncertainty has not been fully factored in. How big a fallout will the Greece crisis be? Or closer to home, China's cooling economy?

These factors will no doubt influence COE prices. But as history has shown, the biggest influence has always been the size of a quota.

And the quota is getting bigger.

A version of this article appeared in the print edition of The Straits Times on July 14, 2015, with the headline 'Keep calm and carry on driving'. Print Edition | Subscribe