Yahoo Finance COE Prices Continue Increasing. But Should Anyone Really Be Surprised?
For the umpteen time, COE prices continue increasing and setting record levels in April 2023. As of the first bidding of May 2023, COE prices are at $101,001 for Category A, $119,399 for Category B and $124,002 for Category E.
Some Singaporeans I talk to are surprised. Their views range from wondering how crazy Singaporeans are to pay such ridiculously high prices for a certificate to own a car, to complaining about how private hires companies are pushing the prices up. Some think foreigners are to be blamed.
Regardless of the actual reasons why COE prices are rising, we shouldn’t be surprised if prices continue further increasing as there are logical reasons that have led to the current record-high COE prices that we are seeing today.
COE Prices Is Based On Supply And Demand. And Supply Is Low
Supply and demand determine the prices of COE. If demand is high, prices tend to go up. If supply is high, prices tend to go down. The opposite applies.
The key reason for COE prices rising is likely due to the lower supply of COE in recent years.
Since 2018, the vehicle growth rate in Singapore for cars and motorcycle have been 0%. While the vehicle growth rate was intended to be reviewed again in 2020, LTA announced in 2020 that it will continue to freeze the vehicle growth rate till 2022. They also subsequently say that the growth rate will continue to remain at 0% until January 2025.
In other words, since 2018, the vehicle growth rate for cars and motorcycles (and thus COEs) have been at 0%. Unsurprisingly, the longer the growth rate for COE remains at 0%, the higher the effect it has on COE prices and we see it trending up significantly from 2020 onwards when the government announced it will continue to freeze the growth rate.
Another reason for the current low supply is that COE supply is also determined by the number of car deregistration over the last four quarters. So if lesser cars deregister, then lesser new COEs will be available for bidding. Unfortunately, according to the recent ministerial statement, we are currently “at the trough in the 10-year cycle of COE supply”.
It’s likely for this reason that the government announced earlier this week that it will be making a one-time adjustment to reduce the volatility of supply in COE quota for Categories A and B. This will be done by bringing forward the guaranteed deregistration of 5-year non-extendable COEs which are due to expire when supply is projected to be higher, and to distribute them first over the next few quarters.
Lower Supply Favours Luxury Cars, Which Further Pushes COE Prices Upwards
The other problem (or feature, depending on your views on what the objective of COE is) with COE is that it doesn’t really take into consideration the value of the car that you are buying.
For example, when Stamp Duty is applied to property purchases in Singapore, how much buyers pay is always dependent on how much the property costs. The higher the property purchase, the higher the percentage of the Stamp Duty paid. And for buyers purchasing their second or subsequent properties, they also pay the Additional Buyer’s Stamp Duty (ABSD).
When it comes to COE, no such distinction is made beyond a simple categorisation of whether a car belongs to Category A or Category B. Whether you buy a Perodua Bezza (OMV of $11,040) or a Mercedes-Benz GLB 180 Progressive 7-Seater (OMV of $36,732), you pay the same Cat A COE. Likewise, whether you buy a Toyota Camry (OMV of $31,224) or a BMW 7 Series (OMV of $108,420), you pay for the same Cat B COE.
As such, when COE supply shrinks and prices go up, the Perodua Bezza and Toyota Camry of the world start to costs more as a proportion of the total cost of the car. On the other hand, Mercedes and BMW car buyers are less affected.
The end result is that when supply is low, the COE system will favour luxury cars. And since luxury cars and their richer buyers are less likely to be price elastic, they are able and willing to pay more for their cars, giving car dealers more leeway to bid a higher price to secure their COE.
Car Sharing Companies Also Benefit
As COE prices increase, the average middle-income Singaporeans are less likely to afford a car. Even if they can afford one, they may choose not to buy one especially if they have a small family.
Instead, such families may opt for other forms of private transport such as renting from car-sharing companies.
Based on our understanding, utilisation rate of cars tend to go up when COE prices are higher. This makes sense. If COE prices are high, drivers, including many younger individuals who have never bought their own cars before, would most likely turn to car sharing as an alternative.
The end result is that car rental and car-sharing companies see greater demand for their vehicles when COE prices go up. Thus, the higher COE prices for these car rental and sharing companies aren’t necessarily an issue.
Similarly, private hire companies and their drivers may also benefit if lesser households own a vehicle. As such, there will be an increase in usage for private hire services allowing the operators to cover the cost of the higher COE price.
According to the government, there are about 70,000 private hire cars in Singapore today and this accounts for about 10% of the car population in Singapore in the past four years.
Rich Foreigners Living In Singapore May Also Buy Cars
In April, the government announced an increase in ABSD with the biggest increase applied to foreigners buying a residential property in Singapore. The increase, from 30% to 60%, clearly shows that a hefty tax needs to be applied for non-Singaporeans buying residential property in Singapore in order to curb the market.
If they intend to live in Singapore, these rich foreigners would likely not just buy homes to live in, but probably would want to buy cars to drive as well. And given their ability to pay such hefty taxes to buy properties in Singapore, it’s unlikely that the high cost of car ownership will deter them.
Currently, there are no restrictions for foreigners to buy cars in Singapore or any additional cost they have to pay.
According to the government, between July 2020 and December 2022, on average, less than 3 percent of car COEs were allocated to foreigners.
Read Also: Will COE Prices Drop During A Recession?
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