Wednesday, 15 January 2014

LTA tweaks COE quota system as supply is set to fall from February to April 2014

Allocations will be determined every 3 months instead of 6
By Christopher Tan, The Straits Times, 14 Jan 2014

CAR certificate of entitlement (COE) prices are likely to rise as the Land Transport Authority (LTA) continued to shrink supply to a new record low yesterday.

There will be 1,800 car COEs available a month between next month and April - about 10 per cent down on the current low of 1,996. The decrease comes despite a new three-month allocation system which the LTA has adopted to make COE supply "more responsive" to demand.

If the previous six-monthly method were used, the new supply would have shrunk by around another 5 per cent.

Including commercial vehicle and motorbike COEs, the new total monthly supply adds up to 3,043 - 12 per cent down from 3,471 a month between last August and this month.

The LTA pointed out that the monthly supply would have been even smaller at 2,884 if it had stayed with the previous allocation method. This is because COE supply for any given period is determined largely by the number of vehicles deregistered in the preceding period.

From July to December last year, more vehicles were deregistered in the latter three months than the first three.

Deregistration is expected to rise in the later part of this year as more cars registered 10 years ago reach the end of their lifespans. This, in turn, will bolster the COE supply and lower premiums.

Motor industry players had mixed reactions to the LTA's new allocation method.

Motor Traders Association president Glenn Tan said the supply squeeze and consequent price rise is now "less acute" than if the six-monthly method were used.

Mr Andre Roy, chief executive of multi-brand agent Wearnes Automotive, said: "It's a better approach but it doesn't make much material change unless they increase the supply itself."

Singapore Vehicle Traders Association secretary Raymond Tang said of the new method: "It can be good, it can also be bad. A big player can control the COE supply by delaying or speeding up the number of cars scrapped (deregistered) because he doesn't have to wait that long now."

Economists also believe the shorter allocation period may be a double-edged sword.

National University of Singapore transport economist Anthony Chin said a shorter period could mean seasonal blips may be translated more sharply on the supply side. "But it could work both ways," he added. "Bidders will know that they have to wait for only another three months for the situation to change."

Some motor traders said the LTA has failed to account for what happened to the number of vehicles deregistered between July and September last year - since only those struck off between October and December have been recycled back into fresh certificates.

But an LTA spokesman said: "There is no loss. We should determine COE supply on a rolling basis, where the number of months taken into account for deregistrations should match exactly the number of months of COE supply to be determined."

Meanwhile, motor traders said average car premiums are likely to stay high, at least up to April, with COEs for bigger and more powerful cars bearing the brunt of this increase. "But there is a limit," said Mr Tan. "If a car is $200,000, the number of people who can fork out a down payment of $100,000 is quite finite."

Latest COE tweak may be more bane than boon
Shorter allocation period does not tackle system's flaws
By Christopher Tan, The Straits Times, 15 Jan 2014

A CAR certificate of entitlement (COE) allocation period based on three months instead of six has mitigated a supply crunch in its maiden quota period from February to April.

Slightly more COEs will be issued than would have been with the old method, to replace the greater number of cars that were deregistered in the last three months than in the last six.

The move, announced by the Land Transport Authority on Monday, was to make the system "more responsive" to market changes than the previous six-monthly method.

But greater responsiveness could also spark that bane of buyers and sellers: sharper price swings.

In the first case, though more COEs will be available in the next quarter, premiums are likely to remain firm, or rise on the whole, as car buyers will still face a 10 per cent cut in what is already a record-low supply. Those buying smaller and less powerful cars may see a dip in prices (because a number of premium brands with powerful engines will exit this segment from next month), but this is unlikely to trigger a buying frenzy.

For that to happen, there needs to be a $20,000 to $40,000 drop in prices for more buyers to be able to afford a new car under new financing rules.

For instance, a new Toyota Corolla Altis costs $132,000 today. If premiums softened by $10,000, it would cost $122,000 - which still requires a down payment of $48,800.

That is still a tidy sum, which means only owners of relatively newish cars can switch, as they could fetch a decent resale price for their vehicles.

Those with older cars - say, eight years or more - would be unlikely to attract resale prices high enough to offset the downpayment.

Similar dynamics apply to bigger, costlier cars.

So because owners will hang on to their older vehicles, and five- to seven-year-old second-hand cars will remain in demand, there will be fewer cars scrapped - leading to fewer COEs issued in the next quarter.

The shrinkage will be starker because the system will now follow a three-month cycle, instead of six.

In the latter half of the year, deregistrations will accelerate, as many owners who have to scrap their cars at the end of their statutory 10-year lifespans this year will wait till the last possible moment to do so, given the prevailing high prices. If it had been a six-monthly allocation system, there would be a higher chance for the events above to even out.

In short, prices on the whole will rise before easing in the latter part of the year.

NUS Business School associate professor of business analytics Chu Sing Fat said a three-month allocation method is not a long-term solution, noting: "A more stable solution is to make the supply of COEs less dependent on short-term deregistrations."

This could be done by setting aside "reserves" during high-supply years to be released in more "meagre" years. In other words, flattening the peak-and-trough supply pattern that has resulted in wild price fluctuations since the COE system started in 1990.

Experts and industry players said a proper review of the COE system should address how supply is determined.

Over the years, the LTA has sought to fix a persistent supply-demand mismatch. In the beginning, quotas hinged on deregistrations of the past 12 months.

Then, the system moved to forecasting, where annual COE supply was determined by the number of vehicles expected to be taken off the road in the current year. Next, the LTA reverted to the first method, but shortened the allocation period to six months.

Still, premiums see-sawed.

COE fluctuations in turn influenced deregistration patterns: High COE prices followed by a season of low premiums accelerated deregistrations. Low COE prices followed by a spell of high premiums resulted in constipated deregistrations.

Soon, the tail began to wag the dog.

The LTA may have missed an opportunity on Monday in its latest attempt to fix the perennial mismatch to delink COE supply from deregistrations, and pave the way for a smoother supply pattern and consequently, smaller price fluctuations. Also, it could have easily postponed a clawback of oversupplied COEs to 2016, when the next supply boom is due.

But it is also quite clear that improving the COE system - which still functions to cap the vehicle population - is not on top of the authority's "to-do" list.

Instead its priority is to move more people to public transport.

For the first time since the start of the COE system, public transport usage share rose in 2012 after periods of decline. It hit 63 per cent, up from 59 per cent in 2008.

The targets are 70 per cent by 2020, and 75 per cent by 2030. Weaning people off cars is part and parcel of a strategy to reaching those goals.

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