New market dynamics look set to flatten the peak-and-trough COE supply cycle as more people hang on to older cars.
JUST over a year ago, former transport minister Lui Tuck Yew said the Government would not rein in the surge in COE supply. The supply surge was because of the large number of cars reaching the 10-year mark, and motorists would be looking to replace these vehicles.
“Let them enjoy the period of growth in the number of COEs coming back into the system first,” he said.
Mr Lui’s statement was greeted with relief (from motorists), and a mixture of doubt anddismay (from motor traders).
The industry had long been lobbying for the Government to flatten the disruptive peak-and-trough cycle of COE supply, arguing that companies have had to hire and fire because of it.
Well, it looks like in this instance, not doing anything was the best thing the Government has done.
The market has adjusted itself, with no intervention from policymakers. Since last year, the number of motorists revalidating their cars’ expiring COEs has been growing steadily.
And since the COE supply is determined largely by the number of vehicles scrapped, the phenomenon has had the effect of slowing down the COE supply tsunami.
This year, the revalidation trend has gained more momentum. In the seven months up to July (the latest available at time of writing), 20,950 car COEs were extended – more than double the 9919 revalidated in the whole of last year, and almost 10 times 2014’s figure.
The 20,950 revalidation totaltranslates to nearly one-third of old cars due for scrappage. Of the lot, 15,591 – or roughly threequarters – were revalidated for five years. The rest, for 10.
If the trend continues for the rest of 2016, 36,000 car COEs would be revalidated by the end of this year, with 27,000 of them being five-year revalidations.
This has reduced the supply of certificates in the last couple of quarterly quotas, which is notentirely a bad thing because the economy is slowing down, with a bigger economic decline expected next year.
What it also means is that the bulk of these revalidated COEs will expire in 2021, resulting in a much needed boost to a COE supply crunch that is expected then.
Why, you might ask, are people revalidating their COEs in such huge numbers?
Many factors are at play, including COE prices not having fallen as sharply as expected (no thanks to Uber and gang), sudden realisation that cars can actually last more than 10 years, and belttightening in preparation for a foreseeable economic slump.
Will the trend ease up when circumstances change? Maybe. But there is another factor on the horizon that could keep it going for a few more years. And that is the CEVS (Carbon Emissionsbased Vehicle Scheme), which started in January 2013.
Cars qualifying for CEVS rebates will have far lower scrap value, since the rebate is a reduction of the Additional Registration Fee (ARF), the main car tax that determines scrap value. And since these cars will have lower scrap value, their owners will have one less reason notto extend their lifespan.
This is because when a car’s COE is revalidated, the owner foregoes its scrap rebate, which is $8000- $10,000 for an ordinary family sedan. A car which had been granted a CEVS rebate would have a fraction of that scrap value, so there will be little or no opportunity cost for the owner if he chooses the COE revalidation route.
The first CEVS cars, which account for an estimated onethird of new cars sold since 2013, will be due for scrap in 2023. If they are revalidated then, the impact will negate the effect of the current batch of revalidated COEs that are due to expire in 2021.
It is too early to predict how this will influence COE premiums, but two things are certain at this point: The COE supply cycle is likely to be flatter from now on (that can only be good news in the long run); and Singapore will increasingly have an older car population (that is also a good thing because it puts a stop to the previous wasteful practice of scrapping vehicles which are still in good working condition).
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“THE NUMBER OF MOTORISTS REVALIDATING THEIR CARS’ EXPIRING COES HAS BEEN GROWING STEADILY.”
