Most Certificate of Entitlement (COE) premiums closed lower on Thursday, 4 Jan 2024, with Category A and B premiums falling to their lowest levels since early 2022 of $65k and $85k respectively.
Category E premium fell to its lowest level of $106k, a price not seen since February 2023.
What is COE?
For the uninitiated, the COE is the quota licence for owning a vehicle in Singapore. The COE system was implemented in 1990 to regulate the number of vehicles on the road and control traffic congestion in land-constrained Singapore.
The licence is obtained through a successful winning bid in an open bid uniform price auction, granting the holder the legal right to register, own and use a vehicle in Singapore for a period of 10 years.
When demand is high, the cost of a COE can exceed the value of the car itself, considering that after factoring in the various taxes on the car such as GST, Excise duty and tiered ARF payable.
Basic costs excluding COE (Basic cost includes GST, excise duty, Tiered ARF, VES rebate/surcharge, and excludes insurance premium, number plates, road tax, IU, and dealer’s commission) as published by the LTA for cars commonly seen on the road, such as a Mazda 3 would cost $32k, a Toyota corolla would cost about $45k while a BMW 318I costs about $130k and a Mercedez Benz C180 costs about $106k. Adding a $65k or a $85k COE to these cars would nearly double the total cost of purchasing a car.
5 year price history
COE prices have been on a massive 3.5 year bull run, starting from the bottom in February 2020 when the pandemic first hit our shores, with prices increasing nearly 5 times.
On the other hand, COE quota plummeted from about 2.3k available certificates combined across the three categories in February 2020 to a low of 1k available certificates each in most months of 2023. This decline in available quota may partially explain the sharp spike in the final phase of the bull run.
COE expiry analysis
The Singapore government maintains a zero-growth policy for COE, meaning that the number of COEs available for bidding is based on the number of deregistered vehicles.
Most vehicles are disposed of after the 10th or 15th year. As the supply of COEs is tied to vehicle deregistrations, COE prices could face downward pressure in years when there is a higher number of vehicles reaching their 10th or 15th year.
We can identify those years based on when each car currently on the road will turn 10 or 15 years old. For instance, if there are more cars today that will turn 10 years old in 3 years compared to those reaching it in 1 year, there could be more COEs available 3 years from now.
Monthly Maintenance cost of a car
If the initial fixed costs of a car haven’t shocked you away yet, take a closer look at the price of petrol in Singapore. A litre of lower octane Grade 92 Petrol will cost nearly S$2.80 (of course one can look towards credit card rebates in the low teens percentages for petrol spending to mitigate the actual cost of petrol).
In comparison, petrol prices in the US hit a high of about US$1.30 (S$1.80) in June 2022 when oil prices were sky high and currently average about US$0.80 (S$1.10). Even in Japan, which is also a net importer of fuel, petrol prices reached a peak of 185 yen (S$1.70).
In addition, one typically has to pay for parking at 2 fixed locations: Home (one can say that the cost of parking is factored into private condos as well!) and Work. Ad-hoc parking, such as by the roads or at shopping malls, usually costs at least $1/hr.
There is also electronic road pricing which charges based on the time and location of usage and costs at least $2 in most instances.
There are also other fixed costs such as road taxes and insurance as well as required maintenance.
Of course, astute car owners will argue that they can get petrol for cheap in Malaysia (Ron 97 costs RM3.47 or S$1) or park for free/cheap as well as get good discounts on their insurance for being a safe driver or in combination with another plan.
However, it is safe to say that a car owner needs at least S$1k a month to maintain a car.
Perhaps the answer is yes. Market watchers opine that the drop in COE premiums was expected, as it was in line with the seasonal slow-down of the car trade. Dealerships typically see less traffic between December and early January and less car-buying activity in general, so taking this round’s results as indicative of COE prices going forward is probably not accurate.
In addition, COE price pressure is normally reduced in the period preceding the Singapore Motorshow, as buyers tend to hold back in anticipation of deals or promotions. This year’s edition of the show runs from Jan 11 to 14. The second round of COE bidding for January starts on Jan 15 and ends on Jan 17.
Heres what we think
If it is not abundantly clear yet, the cost of purchasing and owning a car is expensive in Singapore.
As someone who used to own a car, the one convenience I miss is having the car as my portable luggage where I could keep everything I needed on the go such as spare clothes, shoes, umbrellas, chargers and everything else that is non-perishable.
It is also worth noting that in November 2023, the government stated that more COE quota will be brought forward from peak years to address the current supply troughs while maintaining the zero-vehicle growth policy.
Furthermore, a continued trend of working from home as well as a potential global economic slowdown would also temper the eagerness for purchasing new cars. In fact while there are people who would jump at the chance to buy a car affordably, I believe that the Singapore government policies have bred an entire generation who are strong believers of BMW, being – “Bus MRT Walk” and who would not purchase a car even if COE prices plunges to $0.
Many families or couples purchase a car when there is a specific need and usually this need comes in the form of an aging parent or a child. With the increasing number of singles as well as healthy parents who are aging gracefully, this increasing segment of the population could also lead to overall reduction in demand for cars.
Looking at the 10-year price history, while I don’t think that COE will ever go back to the $20k to $30k range, should COE prices decline close to a $50k range, this would be an attractive entry point for those who need or want a car.