Singapore to become a premium car market?

High-end names such as Audi, BMW and Mercedes-Benz are expected to make up for more than half of new cars sales next year, according to a Straits Times report today.

This is due to the lower number of certificates of entitlement available next year, which predetermines the number of cars sold.

The paper reported that the motor industry is "expecting next year's supply to shrink to between 26,000 and 28,000, from around 30,000 this year, 42,000 last year and an average of 100,000 a year between 2004 and 2008."

With a smaller supply in future COE numbers, are car prices expected to increase again?

Already, a restricted supply this year have caused COE prices to rise to more than $50,000 for cars up to 1,600cc and more than $70,000 for bigger cars, according to the report's figures.

And higher COE prices will naturally favour sales of premium cars rather than bread-and-butter brands like Toyotas and Hyundais, the paper said.

Mr David Ting, deputy editor of motoring magazine Torque, told the paper that buyers and sellers of such premium cars "are better able to stomach expensive COEs than those of mass market brands".

In short, this group is less affected by prices. The COE price forms a smaller percentage of the price of a premium make as compared to a mass-market make.

At today's prices, an average 1,600cc Japanese car is more than $100,000.

Coupled with the premium makes expanding their model range (some even into the Cat A category), lowering prices and investing more in marketing and advertising, the German makes have overtook the Japanese names, Mr Ting explained.

He was quoted by the paper as saying: "I think this might be the 'new normal' going forward."

Opinion: Car prices to head south soon

At the time of writing, the COE for cars up to 1600cc was at $48,801, and the COE for cars above 1600cc was $70,890. The Open COE, a proxy for the latter, was $70,117.

Around the same time last year, they were between $30,000 and $43,000. And as recently as three years ago, the same premiums were mostly around $15,000 or less. With the COE supply staying tight for the rest of the year, the chances of a crash are as far-fetched as you finding a bikini babe on Pluto.

The world economy and stock markets are faltering, you say? Well, history has shown that the Singapore car market can be pretty resistant to socio-economic influences.

The single biggest determinant of prices has always been the number of entitlement certificates in the system. And the current supply is merely a quarter of what they were in the bountiful years of the mid-2000s.

Yes, if consumer sentiment is dampened by the sorry state of the world's former economic powerhouses (which, if you ask me, have not really recovered from the 2008-2009 financial meltdown), people's appetite for shiny new cars will weaken. But this won't make COE premiums nose-dive. At most, you might witness prices stabilise after a soft landing.

If a recession hits and persists, and employers wield the axe on salaries and headcounts, then all bets are off. But even then, we might not see premiums see-sawing like they did during the Asian financial crisis of 1997-98, because of the limited quantities of COEs currently. And unlike that period, "taxi participation" is a major factor today.

This is because there are many more cab companies as well as a larger population of taxis - both fuelling a demand for COEs. On top of that, the human population in Singapore has also increased significantly.

So, when will COE prices fall back down to below $20,000? Will they ever? The short answer is probably - and sooner than you think.

Again, this has to do with COE supply, which will start to rise as the enormous cohort of cars registered during the COE boom years of 2003-2008 come of age and are scrapped. (COE supply is determined largely by the number of vehicles taken off the road.)



Scrapping bonanza

If you look at the age profile of passenger cars on the road today, you will get a pretty good idea of when this scrapping bonanza will start to happen. The first wave is likely to take place between mid-2013 and early-2014.

The next wave - a bigger one - will be in 2015. And by 2016, we should see COE supply reaching tsunami scale. This will be followed by a couple more years of sizeable quotas before supply starts to shrink yet again.

Barring a fundamental change to the way COE supply is determined, car buyers and sellers will continue to experience a feast-and-famine situation. COE premiums and corresponding new car prices will continue to fluctuate from year to year.

The savvy consumer should align himself or herself to this cycle which, if you'd notice, makes a full circle once every 10 years.