Certificate of entitlement (COE) premiums are on the rise. Compared with the start of the year, car COEs have climbed by 28 to 59 per cent to $33,199 (cars up to 1,600cc), $48,000 (cars above 1,600cc) and $52,410 (open).
Folks looking to buy a new car might be alarmed. Should they rush out to buy before prices rise further?
In a word, no. Because doing so will only fuel the premium hike. Time and again, we have seen similar market responses sending prices even higher and resulting in a self-fulfilling prophecy.
The right thing to do is to resist the temptation and wait it out. What goes up will come down and COE prices are no exception.
Let those who choose to succumb to fear flock to the showrooms. They might drive prices up, but it will be temporary and at their expense. Once demand from panic buying is soaked up, prices will head south.
More so, since the factors fanning the COE flame in recent months have little to do with retail demand. More likely than not, they were linked to competition between the two private-hire operators - Grab and Gojek - here.
Changes to regulations governing the private-hire industry are expected in the next couple of months. Operators could be expecting these changes to have an impact on their businesses and are rushing to grow their fleets now - before new rules are announced.
There are two possible scenarios ahead.
One, if these new rules are what the industry expects, COE prices will ease because they will no longer be able to operate the way they have been, which drove them to rush for COEs in the first place.
Two, if the new rules are not what the industry expects, COE prices will also ease because players would have "bought forward" and no longer need to secure COEs as aggressively as before.
Consumers who join the rush now will run the risk of facing negative equity - when the residual value of the car is less than the balance of the owner's loan - when a correction in COE prices comes (and it will come).
Many who bought their cars three to five years ago are facing this situation. Some are scrapping their cars prematurely and replacing them with new ones with lower COEs. This is a costly exercise, even if it appears to be one which allows consumers to cut losses.
It would be far more prudent to wait for the current frenzy to die down before making your way to the showroom.
The considerations are similar for car owners looking to extend the lifespan of their current rides. Some are looking to pay the prevailing quota premium (PQP) now, even though there are several months left before their vehicle's COE expires.
They should likewise resist doing so. Especially if the expiring COE is a relatively inexpensive one. They should instead enjoy the use of their low-COE car right up to the last possible day.
If PQP - a moving average of quota premiums - turns out to be higher than they are now, so be it.
Scrapping a car before its run-out date has a cost too. For instance, if a car has an annual depreciation of $7,500, deregistering it six months earlier would incur an implicit cost of $3,750.
Will COE climb $3,750 over the next six months, after having risen by an average of $10,000 since the beginning of the year? Well, even if it does rise by more than $3,750, the cost to those who wait will not be significant.
At the same time, those who choose to wait stand the chance of paying a lower PQP should premiums soften.
And which direction premiums head in the next few months will depend largely on how consumers behave in the next few weeks.
As for the irrational exuberance of private-hire operators, upcoming regulatory changes will hopefully rein them in.
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