COE supply not increasing enough to bring down high prices: observers

DESPITE an increasing Certificate of Entitlement (COE) supply, industry observers expect premiums for passenger cars and commercial vehicles to remain elevated at least until 2026.

After falling since 2016 to a low in 2023, COE quotas for Category A, B and C – which cover mainstream passenger cars, larger passenger cars and commercial vehicles, respectively – have now risen back to levels similar to 2021.

Yet their premiums remain far above 2021 levels, as the increase in supply is outpaced by rising demand.

Since May 2023, the Land Transport Authority (LTA) has been boosting the COE supply by its “cut-and-fill” method of bringing forward additional quota from guaranteed future deregistrations.

But further supply increases are hindered by two main factors: a new method of calculating COE quotas, introduced in 2023, and more vehicle owners choosing to revalidate their COEs.

Deregistrations are expected to rise significantly only from 2026 – with passenger car and commercial vehicle dealers not expecting lower premiums until then.

Slow climb

Firstly, LTA’s revised quota calculation method is partly responsible for limiting supply in the first half of 2024.

The supply of COEs, announced every three months, is chiefly determined by the number of vehicle deregistrations in the preceding period. This is because of Singapore’s zero-growth policy for the non-commercial vehicle population.

Previously, each three-month quota was calculated based on deregistrations in the previous quarter, with some adjustments as well as a one-month lag for processing and computation.

In August 2022, that was changed to the rolling average of deregistrations in the previous six months; then, in February 2023, to the average of the previous year. This was to reduce the quarter-on-quarter volatility of COE supply, said LTA then.

Walter Theseira, associate professor of economics at Singapore University of Social Sciences, said: “(COE supply) would have increased faster if not for the ‘smoothing policy’ implemented by LTA.”

This is because a near-term rise of deregistrations will not show up entirely in the immediate next period.

Still, the smoothing policy has achieved the LTA’s aim of reducing volatility, noted Prof Theseira. “It is meant to reduce the likelihood of extremely high prices due to unusually low supply in any quarter… and (late 2023’s record high COE premiums) could have been far worse with a very small COE supply,” he added.

Prolonging the inevitable

A second factor hindering quicker increases in COE supply is a rise in revalidation.

A COE lasts 10 years, after which the vehicle must either be deregistered or have its COE revalidated.

Passenger car COEs can be revalidated every 10 years by paying the current three-month average of the COE premium – known as the prevailing quota premium – or for five years at half the premium. After a five-year revalidation, the car must be deregistered.

In the first five months of 2024, 11,117 vehicles had their COEs revalidated – a whopping 80.6 per cent or 4,963 more than the year-ago period. Passenger cars and commercial vehicles accounted for about a third each.

In the same period, 23,690 new vehicles were registered, meaning that revalidation volume was nearly half that of new registrations.

Sabrina Sng, managing director for Lotus, Polestar and Insurance at dealership group Wearnes Automotive, said: “We didn’t expect there to be so many revalidations.” 

Passenger cars which had their COEs revalidated were likely mass market cars, as it was cheaper to do so than to purchase a new vehicle, she said. “But if (COE) prices remain high, it could lead to a vicious cycle, as more revalidations means less deregistrations, and less COE quota.”

Raymond Ong, associate professor of civil engineering at the National University of Singapore, said that it costs less to revalidate a COE than buy a new vehicle and get a new COE, so with COE prices remaining high, it makes “simple economic sense” to revalidate.

Category C COEs, for goods and commercial vehicles, can be revalidated for 10 years or five years repeatedly, but only up to a maximum lifespan of 20 years.

The sales manager of a commercial vehicle dealership handling Chinese brands said: “At the current S$70,000 level, the (Category C) COE is too high for many businesses.”

He added: “Most of them no longer have the option of the Early Turnover Scheme (ETS), so they would rather renew a cheaper five-year COE and wait for the premium to come down before buying a new vehicle.”

The ETS provides a discount on the COE when an older vehicle is replaced with a cleaner one, but it is only available for cars registered from 2001 through 2013, and deregistered between Apr 1, 2023, and Mar 31, 2025.

Uncertainty ahead

Revalidations of commercial vehicle COEs may also be rising because fleet owners are holding back on replacing their vehicles with electric ones.

This is due to uncertainty over electrification, said Prof Ong. As replacing an entire fleet with electric vehicles can be costly, owners are trying to contain their business costs by revalidating instead.

Both Prof Ong and Sng expect the COE supply to increase significantly – and thus for prices to moderate – from 2026, when large numbers of vehicles reach 10 years of age.

“Those who are revalidating are, ironically, preventing the COE supply from increasing,” said Sng.

Furthermore, LTA’s cut-and-fill approach aims to keep COE prices stable and not necessarily to reduce prices, she added. “But even with cut-and-fill, prices have remained high for all of 2024. For the owners who are waiting for a price drop, it may never happen, especially if the recent revalidation trend continues.”