Monday, May 4, 2015

COE: Going Higher or Lower?

I read this article recently about COE.

I don't want to toot my own horn, but I feel that I am quite familiar with the car market in Singapore. I ever had a project back in school where we had to predict the following rounds of COE bidding prices. I was a really bad groupmate and my group actually did most of the work on that project. However, that's when I really understood about the quotas, growth factor, deregistering, etc. All of that has stuck with me.

In the article, the author Chris Tan firmly says that he is very confident that the price of COE will be lower in the near future. The reason for this drop is the ever increasing supply of COE that will be issued.

His point about the increase in COE is correct, but I think that his conclusion is wrong.

Even though more and more COE will be issued in the future, especially when compared to the past 2 years, what the author did not take into account is the MASSIVE amount of cars that are reaching their 10 year mark and has to de-register their vehicles.

Did you know that the car population is Singapore is not even growing at the paltry 0.25% rate that the LTA has stated? Don't believe me? Go make a time series of the car population from the statistics page. It has been declining since 2014. (Sorry, too lazy to extract the data and graph it for y'all today)

And the car population is going to be dropping over a cliff over the next few years, which is why the government has to issue massive supplies of COE. But the issue of the COE is to replace the cars that are de-registering and leaving the population, instead of increasing the total supply.

So, let's see what we have.

We have a declining total supply (new issues are less than deregistrations)
We have replacement demand (from those who have just deregistered)
Plus we also have absolute demand increasing due to a bigger population and affluence

Supply down, demand up. I might have only taken H1 Economics back in school, but I think that means that prices go up.

If prices of cars drop, it will not be because of an increase in supply. Au contraire. If the price drops, I am quite sure that will be a demand shock.

People who are de-registering this year bought their cars back in 2005. Back when COE was around $15,000. Today getting a Cat A COE will set you back around at least $60,000, which is 4 times what they paid. Many will get sticker shock and really take out their calculators and do their sums if a car really is worth all that money. For people who do not require a car for their line of work, I think many will pass on getting a car. The cost of owning a car probably outweighs the benefits of it, especially if it is for convenience and leisure.

Taking a taxi everywhere will cost you 50% of what you would pay owning a car. Public transport? Probably only 5%. Being realistic, flexible and savvy altogether to only take taxis when urgent and to stick to public transport when there is no rush? I would estimate 25% the cost of owning a car. That should save you at least $15,000 a year. This is from a scenario that moneysmart came up with in 2011, so I am sure you would actually save a lot more money.

To summarize, I don't think that COE will drastically fall. Prices might drop a bit, but it would not be a significant trend downwards. My best guess is that is going to hover around these slightly lower levels and tend upwards eventually as long as everything is hunky dory.

However, if there is a price slump in the future, it would be because of a demand drop, not supply expansion. That could happen if Singapore goes into a recession. Well, if that does happen, maybe we can get $2 COE again.

My personal wish? It is not for more and cheaper COEs and cars, but it is for a faster, more convenient and denser public transportation network, for all to enjoy.

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