Foregone Conclusion – COE To Cost More From 2018?

The latest COE news is that our government will stop vehicle population growth for private cars from January of 2018 onwards – this has sent some shock to consumers, not helped by the fact that news and media are reporting on it in a reactive and alarmist manner – proclaiming not just a rise in COE prices for early 2018, but “set to rise in the next few years”. We’ve already commented on the situation briefly in our Facebook post of October 25th, but I feel it warrants some additional analysis so the potential car buyer can be more informed.

What is the shock about? LTA often dabbles with the COE and other vehicle related taxes (COE is also a tax, no?) such as the latest change from CEVS to VES – the new emissions scheme that will be in force from January of 2018.

Little Tweaks

We have seen a history of little changes on policy from time to time, and this is not the first time that the population growth rate of vehicles has been reduced – the emphasis is on the words “growth rate”.

First and most importantly, it is not as someone who approached us said, “The government will stop issuing COE from next year! I better buy a car for my daughter now before it’s too late”.

No growth merely means the same number of COE will be issued as the number of cars that are scrapped and taken off the roads because their COE have expired. So there will still be COE bidding (you can sigh in relief now) and the number of COE are not going to shrink, but overall vehicle population will be maintained at the same as now.

In the past, such little changes (the latest change being only 0.25% reduction) have not had any long term, lasting and significant effect on COE prices, and I’m going to tell you what, in our opinion, does…

It’s The Economy

Any surge in prices for COE will be shortlived, and of the knee-jerk category if the economic situation remains as moribund as it is now. The want or need for a car can only be sustained by the available resources of a buyer to pay for it.

When finances are tighter than before, as it is now for the general public, this is a significant item that the average Joe can cut back on in two ways – either forsake owning a car (less demand for COE) or bargaining at the showrooms, signing only when better deals are offered, resulting in most distributorships or dealers bidding at a lower amount.

Both these factors point toward lower COE prices.

However, there is a chance the COE price will rise towards the end of the year, and given the above I’ve explained, you will ask why. Well, the short term reaction from the general public for one, plus the dealers that have signed guaranteed COE packages with their customer (having to deliver by a certain deadline – usually 6 bids).

This scenario will often iron itself out within a three month period, as dealers re-adjust their sales pitch and selling prices to customers to save them also feeling the pinch of having to deliver cars at high COE prices which crimp their profits. Then we should see the COE slide to lower, and more regular levels once more. Regular, I would define, as a situation where no new policy changes are made by LTA.

Another Test

As the VES scheme kicks in next year, many of the current range of vehicles will be taxed more, based on the highest of the five exhaust gases monitored, we should see prices as showrooms rise.

The test is this – as prices at showrooms rise, some by $5,000 – $15,000 or more depending on model, it would be an interesting thing to see if the COE will fall over the longer term by the same amount the VES taxes have risen. If this were the case, that would prove our theory, that there is a ceiling price that consumers are willing or able to pay for their car.

There is, after all, a limited amount of funds that any typical family has at it’s disposal for transportation needs. As more taxes are introduced, it doesn’t mean that LTA will gain more revenue – in our opinion it will balance out and once again, move towards a regular level.

We have to, in this analysis, exclude the atypically rich top 3-5% that can pay the COE whatever price it may be. But it would be correct to exclude them, as COE quota available for bid are in the thousands – the rich being a small percentage of the general population of bidders do not sway the price by much – they also do not pay above what the average Joe bids, everyone pays the lowest successful bid.

Moving Forward

Yes, we are looking forward to the new year 2018! One of the reasons is to see if LTA would indeed collect more revenue by introducing VES or, probably not their preferred outcome, cause COE levels to become dampened by its introduction. You know where we lean towards, it’s all economics and on that front, we are not doing so strongly at the moment.