Why Are Car Prices Going Up?

13 May 2019

If you’re in the market for a car in Singapore recently, you would probably have been keeping an eye on Certificate of Entitlement (COE) prices. And you’ll probably notice that they have been on an upward trend of late.

After what can only be described as a rocky 2018, with premiums bottoming out towards the end of the year, it appears that COE prices are heading for an upward trajectory in 2019. Indeed, Cat A COEs have been gradually rising since February, breaching the $30,000 mark in the latest exercise in April for the first time in eight months. Cat B COEs have seen even more dramatic increases, having been constantly moving upwards since the start of the year, and reaching $48,000 in the last exercise, a level not seen since 2017.

But why are COE prices going up? Are the days of affordable COEs about to come to an end?

Reduction In Quota

The first thing you need to know is that the COE operates as a quota system. The Land Transport Authority (LTA) determines how many COEs are available for a defined three-month period, and based on this and the classic economic principle of supply and demand, determines the prices of COEs. 

So in simple terms, more COEs, lower prices, and vice versa.

Obviously there are other factors that come into play, such as market sentiment, but in general, the COE quota is what drives COE prices. And if you’re following so far, you can infer that the rising COE prices of late are due to a reduction of quota in recent months. 

And you would be correct. From February to April 2019, the quota of Cat A COEs was reduced by 9.1 percent, while Cat B COEs saw a cut of 2.9 percent. Cat E Open COEs (available for all vehicles but mostly used by cars) saw a pretty significant reduction of 26.4 percent. That’s quite a number of cars when you add them up. 

Recently announced quotas by the LTA sees further cuts for the period of May to July, with Cat A further reduced by 13.7 percent, and Cat B seeing 5 percent less COEs available. Cat E Open COEs meanwhile sees another 5.7 percent cut for the period. 

What does it all mean? Well, as mentioned above, smaller quotas mean higher prices, given the limited supply that is almost always outstripped by demand, as there will always be folks who will be buying cars no matter the price.

If you’re hoping to snag a COE in the $20,000 range, as they were in 2018, unfortunately it looks like your ship has sailed. But for the time being, COE premiums are still ‘relatively’ affordable, so all is not lost.

There are options out there if you’re looking for a car right now. You just have to be a little flexible about it.

Go Used

The general advice is that, given that COE premiums are set to increase further due to the reduced quota, it would be wise to hold off buying a new car for now. Unless you desperately need one, and don’t mind paying around $30,000 to $40,000 for a COE, it would be wise to hold your horses for the time being. At the very least, wait until premiums stabilise over the next few months before you make your next step.

However, if you need a car and it doesn’t have to be new, you can go for the second hand route. New car prices do tend to have an effect on the second hand market, as prices will go along in tandem. And so with the lower premiums of the past year still having a lingering effect, there are plenty of decent used cars on the market for you to choose from at a reasonable price.

Renew Your COE

If you already have a car, and its COE is about to expire, now is the time to seriously consider prolonging its lifespan. The Prevailing Quota Premium (PQP), or what you need to pay to extend your car’s COE further, is still sitting at around the $28,000 for Cat A as of May 2019 (and a slightly higher $39,000 or so for Cat B), and that value drops to half if you decide to only extend it for five years instead of the full 10.

If you feel that your car still has mileage to offer, now is absolutely the best time to take advantage and give your car a new lease of life for a lot less than you think. PQPs will increase along with new car COE premiums, so you should strike while the iron is hot before prices go up in the next few months.

While new car prices may be on the up and up, there are still possibilities out there if you need a car right now, as long as you keep your options open.

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