Cut could result in what it is aimed at preventing - wild fluctuations
By Christopher Tan 13 March 2010
If the vehicle quota system were a car, it would have been recalled a long time ago - or so goes a rather lame industry joke.
For a country that periodically reviews its education, health care and a whole host of other policies, there is certainly no shame in fine-tuning a system that determines how many cars there are in Singapore.
So why did it take the Government so long to note that the COE system as it is currently structured was not working as intended? After all, it has created a feast-and-famine cycle for car buyers; and more to the point, it has caused a sudden load increase on our roads in the last five years.
One possible reason the authorities did not fix the system earlier is that they may have assumed the system would self-correct in the long-run. Whatever the reason, it is good the authorities have decided to fix it.
The question now is, whether the new COE supply formula announced by Transport Minister Raymond Lim on Thursday will result in a more sustainable vehicle population growth rate. And will it do a better job of matching supply and demand than the present system?
On paper, the revised formula makes eminent sense. Instead of determining each year's quota by predicting the number of vehicles that will be scrapped that year - a process akin to gazing at a crystal ball - the new formula will be based on past deregistrations and will be revised at six-monthly intervals.
For instance, the August 2010 to January 2011 quota will be based on the number of vehicles scrapped or re-exported between January and June 2010.
The new formula will replace uncertain forecasts with a transparent and predictable method so consumers can gauge how many COEs will be available during any six-month period.
But the way in which the new formula is applied will be somewhat marred, inevitably, at least in its initial stage. This is because deregistrations last year were abnormally low - the lowest since 1999 - because of the global recession. People generally resist spending on non-essentials in a downturn, especially if the non-essential is a big-ticket item.
So to start the new system from this unusually low baseline may cause pent-up demand for cars in the years ahead - especially since the quotas over the next two years will include adjustments for the oversupply of the past two years.
So the supply of COEs from next month to July will be about 40per cent lower than the same period last year. That can only mean one thing: sharp increases in premiums, and consequently, car prices.
When faced with such steep price rises, consumers are likely to do one of two things: hold back in the expectation prices will come down; or rush in, in the expectation that prices will rise further.
In the past two years, they have tended to hold back. But a strengthening economy could well trigger a rush. This is what we witnessed in the mid-1990s, when premiums shot up as high as $110,000.
There is a need to correct a flawed system. But we should try to avoid the possibility of the new formula causing what it set out to prevent: wild fluctuations.
Mr Lim said the new system will be 'self-compensating, because lower deregistrations also mean that there will be fewer car owners bidding for COEs to replace their cars'.
That is true to an extent, especially over the long term. But Singapore has seen an influx of newcomers in recent years. The resident population has grown by 500,000 since 2000. The newcomers are likely to make their presence felt in showrooms as they get used to the relatively high cost of motoring here. A deluge of first-time buyers placing upward pressure on premiums is a possibility that cannot be ruled out.
For all these reasons, perhaps the authorities could consider making a one-off adjustment to the initial quota size following the formula change. Perhaps they could base the first quota on the average deregistrations over the last two years. This would give rise to a smaller initial contraction than basing the quota on deregistrations in the second half of last year.
And if the authorities deem it necessary, this one-time compensation could be 'amortised' over the next 10 years in the form of minor deductions each year.
This suggestion is similar to the recommendation a review committee led by Mr Chay Wai Chuen made when the COE system was tweaked back in 1999. The committee foresaw bumper crops of COEs for 2000 and 2001 and suggested that some be kept for less abundant years ahead.
In recent years, several motor traders have been making the same call. In November 2008, the Singapore Vehicle Traders Association and the Automotive Importers and Exporters Association lobbied for a cut in the COE supply.
They said nose diving COE prices - culminating in a crash to $2 - would drive down the cost of new cars and kill the used car market.
The reason for their call was not entirely sound. But we would have been better off if the supply had been trimmed anyway, because COE supplies of the last few years far exceeded the actual number of vehicles taken off the road.
Now, with premiums set to head towards the $30,000-$35,000 range (and perhaps even higher later), a few things will follow. The budget car brands will fall out, as their dealers will not have enough in the way of margins to compete with the others. Buyers will also avoid these cars, as the value of the COE becomes disproportionately high when compared to the price of the car. Budget buyers will instead veer towards used cars. The used car market will pick up further.
People with means will buy more premium marques. In the mid-1990s, when COEs were sky-high, Mercedes-Benz was among the top three sellers here.
Motor traders will sell far fewer cars, but they are likely to enjoy fatter profit margins. This is because margins are better concealed when COE prices are high.
The cost of living will rise - mainly for those who insist on driving. But hopefully, that will encourage more people to use public transport, which of course could well be an implicit intent of the COE policy.
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COE supply: Jams ahead?
Cut could result in what it is aimed at preventing - wild fluctuations
By Christopher Tan
13 March 2010
If the vehicle quota system were a car, it would have been recalled a long time ago - or so goes a rather lame industry joke.
For a country that periodically reviews its education, health care and a whole host of other policies, there is certainly no shame in fine-tuning a system that determines how many cars there are in Singapore.
So why did it take the Government so long to note that the COE system as it is currently structured was not working as intended? After all, it has created a feast-and-famine cycle for car buyers; and more to the point, it has caused a sudden load increase on our roads in the last five years.
One possible reason the authorities did not fix the system earlier is that they may have assumed the system would self-correct in the long-run. Whatever the reason, it is good the authorities have decided to fix it.
The question now is, whether the new COE supply formula announced by Transport Minister Raymond Lim on Thursday will result in a more sustainable vehicle population growth rate. And will it do a better job of matching supply and demand than the present system?
On paper, the revised formula makes eminent sense. Instead of determining each year's quota by predicting the number of vehicles that will be scrapped that year - a process akin to gazing at a crystal ball - the new formula will be based on past deregistrations and will be revised at six-monthly intervals.
For instance, the August 2010 to January 2011 quota will be based on the number of vehicles scrapped or re-exported between January and June 2010.
The new formula will replace uncertain forecasts with a transparent and predictable method so consumers can gauge how many COEs will be available during any six-month period.
But the way in which the new formula is applied will be somewhat marred, inevitably, at least in its initial stage. This is because deregistrations last year were abnormally low - the lowest since 1999 - because of the global recession. People generally resist spending on non-essentials in a downturn, especially if the non-essential is a big-ticket item.
So to start the new system from this unusually low baseline may cause pent-up demand for cars in the years ahead - especially since the quotas over the next two years will include adjustments for the oversupply of the past two years.
So the supply of COEs from next month to July will be about 40per cent lower than the same period last year. That can only mean one thing: sharp increases in premiums, and consequently, car prices.
When faced with such steep price rises, consumers are likely to do one of two things: hold back in the expectation prices will come down; or rush in, in the expectation that prices will rise further.
In the past two years, they have tended to hold back. But a strengthening economy could well trigger a rush. This is what we witnessed in the mid-1990s, when premiums shot up as high as $110,000.
There is a need to correct a flawed system. But we should try to avoid the possibility of the new formula causing what it set out to prevent: wild fluctuations.
Mr Lim said the new system will be 'self-compensating, because lower deregistrations also mean that there will be fewer car owners bidding for COEs to replace their cars'.
That is true to an extent, especially over the long term. But Singapore has seen an influx of newcomers in recent years. The resident population has grown by 500,000 since 2000. The newcomers are likely to make their presence felt in showrooms as they get used to the relatively high cost of motoring here. A deluge of first-time buyers placing upward pressure on premiums is a possibility that cannot be ruled out.
For all these reasons, perhaps the authorities could consider making a one-off adjustment to the initial quota size following the formula change. Perhaps they could base the first quota on the average deregistrations over the last two years. This would give rise to a smaller initial contraction than basing the quota on deregistrations in the second half of last year.
And if the authorities deem it necessary, this one-time compensation could be 'amortised' over the next 10 years in the form of minor deductions each year.
This suggestion is similar to the recommendation a review committee led by Mr Chay Wai Chuen made when the COE system was tweaked back in 1999. The committee foresaw bumper crops of COEs for 2000 and 2001 and suggested that some be kept for less abundant years ahead.
In recent years, several motor traders have been making the same call. In November 2008, the Singapore Vehicle Traders Association and the Automotive Importers and Exporters Association lobbied for a cut in the COE supply.
They said nose diving COE prices - culminating in a crash to $2 - would drive down the cost of new cars and kill the used car market.
The reason for their call was not entirely sound. But we would have been better off if the supply had been trimmed anyway, because COE supplies of the last few years far exceeded the actual number of vehicles taken off the road.
Now, with premiums set to head towards the $30,000-$35,000 range (and perhaps even higher later), a few things will follow. The budget car brands will fall out, as their dealers will not have enough in the way of margins to compete with the others. Buyers will also avoid these cars, as the value of the COE becomes disproportionately high when compared to the price of the car. Budget buyers will instead veer towards used cars. The used car market will pick up further.
People with means will buy more premium marques. In the mid-1990s, when COEs were sky-high, Mercedes-Benz was among the top three sellers here.
Motor traders will sell far fewer cars, but they are likely to enjoy fatter profit margins. This is because margins are better concealed when COE prices are high.
The cost of living will rise - mainly for those who insist on driving. But hopefully, that will encourage more people to use public transport, which of course could well be an implicit intent of the COE policy.
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