Thursday, July 28, 2011

COE Trend Analysis by MadScientist - July 2011

COE Trend Analysis by MadScientist

So... Cat B and Open Cat COE prices just breached $70,000 this week. What next?

Why are COE prices sky rocketing?
Do car prices go up proportionately as well?
Importantly perhaps, what is to become of the COE prices in the near and not-that-distant future?

I want to buy a car but...
Shall I change car?...
Should I buy brand new or second hand car now?

IF some or one of these questions are on your mind, read on...
I got my COE at 6K after timing the market and with a dash of luck... I am out to look for the next round. It looks impossible now, but hey, anyone would say the same when COE was at 105K about COE being <$600 for two bidding! The best time to prepare is when no one is looking... So here are my observations. In 2006, I knew I had to change out of a Corolla sedan to a MPV... It was to be the Wish, and the new Stream came out about that time. We decided on the Stream, no regrets, and looked to when to buy. I looked at the annual seasonality of COE bidding and found my sweet spot... We got the RSZ at possibly the cheapest ever, <73K, 6K being COE. It was a damn good buy. My view is that over a 3, 5, 10 year period, you usually hold on to a depreciating asset. Here's why... At any time, your COE and OMV depreciates, and faster for OMV when armistice past 5 years old. The only time you gain proper is when you buy low and sell it off, never to buy another car until the COE drops again. So regardless of whatever the industry people say, I prefer to keep COE and OMV low. Now, with OMV, although it looks uncontrollable nor predictable, you can see it in the currency exchange rates. Japanese car OMV relate to the JPY/SGD exchange rate. COE is internal to SG, and is fluctuating according to our national conditions, while being affected by global conditions. So, having a low base for both gets you started out losing less... Case in point, current RSZ is about 150K... COE 72.5K. Based on COE alone, every month you lose $600 for sure. For me, I lose $50 per month on COE. That's a difference of 500%!!! OMV is no better.... My OMV is 21K... So when I sell off the car, I get back say 50% of the OMV, losing 10.5K. The current OMV is about 28K, and losses amount to 14K, a difference of 3.5K. Clearly the COE component is the main feature, and that is why I do not agree with industry sales people when they say that buying with high OMV is good. IMHO, buying when things are really cheap is the best, period. Now, the developments in the COE escalation can be attributed to a number of factors, namely, a change in the formulation and hence quota release, a positive change in the economic climate, interest rates, and population growth. I had tracked and compiled COE prices for CatB since the introduction of COEs. The graph below shows the COE prices and the STI, a loose measure of the economy. When overlapped, you see that the COE prices somewhat correlate with the stock market... Up until 2003, when markets ballooned without COE prices. Then in 2009, the correlation is back. The current situation is reminiscent to the early days of COE, where the COE prices track the stock markets.

Now, I wondered why there was a period of equity bullishness and COE bearishness. Looking at the quota numbers released, one can see that for a time, the quota numbers averaged 300-400 per bidding basis. Then the quota numbers increased drastically about three-fold per bidding. This is the causative factor for the detachment of COE prices as supply was abundant.

In the early days, you can see that demand (determined by the bids received/quota available) was high, averaging 3-4 times of overbidding as compared to the 1.2-1.5 times overbidding since 2003. This reiterates that supply was abundant and it kept up with demand from 2003.

However, in 2009, something changed. After the GFC, and COE tanked solidly, LTA tweaked their formulas and brought the quota levels to approximately 400 per bidding. This sudden removal of supply inadvertedly caused a spiked in COE prices. Looking back in history, an estimation that the COE prices should hover about 40-50K on average. However, we are seeing an excess of 60K, exceeding 70K in the recent bidding.
So, what accounts for this 50% excess of COE market prices?

An indication comes from a rather indirect correlation, which took me some time to figure what was driving this insanity…
Looking at the SG interest rates since 2005, we see something interesting happening. 2006 saw the recent highs in interest rates in SG. This affects the loan interest levels, and if I remember correctly, loan interest was 3-3.5% at that time. And that was for a new car. 2nd hand cars were demanding 4% or more on interest rates for car loans. After the GFC, interest rates (which follow US interest rates) were minimally kept at <1%. The current car loan interest rate is about 2.5% on average, but you can get 1.88% on 95% financing for new AND used car (for 4-10 years)!!! See:


So, point here I am making is that SGporeans are getting leveraged to change new cars.
The last surge in car numbers was in 2007-2008. This means that most car owners bought their cars during that time period, and at albeit higher interest rates. With the current situation, some refinanced, some changed cars. Now, think about this… How long do we know that the car paper value starts to deteriorate? About 5 years. This means that you need to sell off the ar by the 5th year or you lose lots more. Car owners who got cars in 2007-2008, like me, half of them decided to hold on. The other half changed cars at higher prices, with lower interest rates. This is all and well – for now.
The next cycle should come in about 4-5 years from 2007-2008. Look carefully at the peaks in COE prices… they are spaced about 4-5 years apart… 1992, 1997, 2002 (delayed from dotcom crash), and 2007-08 peak. So the next peak expected to be 2013 thereabouts? Nah… I think not… it may be delayed to 2014. In any case, there is a peak cycle but a COE low trough cycle exists too… just before the peaks, COE tanks hard.

Now, I was told that taxicabs cycles are influencing the COE… think about it… we cannot have taxi cab companies with COEs that are 100K per cab right? The costs to the cab companies would be tremendous!
So, I looked at when the cabs last has a shopping spree… lo and behold, they went shopping in 2005-2006. Now, in 2003, it was legislated that Taxicabs have a lifespan of 8 years on the road… not 10 like our cars. So, this means that the next shopping spree should be starting about 8 years from 2005. That brings a (rather) co-incidental 2013, doesn’t it? They tend to accumulate when COEs are lower, either by chance or a deliberate (co-ordinated) mechanism.

1. COE prices will likely moderate and drop… when
a. Interest rates go up, as they are never sustainable in high interest rates environment
b. When LTA decides to change and allow increasing quota (which they should in a couple of years)
c. When taxicabs need to be replaced (conspiracy theory comes alive)
2. Those who buy now, will be stuck for almost 10 years or depreciating in excess of 12K annually for their vehicles.
3. There will be a drop in COE prices… in time to come, and my guesstimate is about 2013-2014.

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