$100k COE analysis: A one-off freak result, or a sign of things to come ahead?

We're still reeling from the shock of seeing Certificate of Entitlement (COE) prices breach the $100,000 mark this week, in not one but two categories no less.

Premiums in Category B, for internal combustion engine (ICE) cars with engines that make more than 130hp, or are above 1.6-litres in capacity, and electric cars with outputs of more than 147hp, ended the exercise at $100,684.

Category E meanwhile, which is open to all vehicles except motorcycles, but usually ends up being used for big cars, saw premiums land at $100,697.

COE prices broke past S$100,000 in both Cat B and Cat E in the latest bidding exercise

It's the first time since 1994 that we've seen COE prices hit six digits, and we have staff members in the CarBuyer office who weren't even alive when that phenomenon last happened. But is this a one-off freak result, or a sign of things to come ahead?

The general sentiment around the car industry when the results dropped on Wednesday (June 8) was a mixture of jaw-dropping disbelief, along with a sense of resigned acceptance.

After all, COE premiums have been building on an upward momentum in recent months, and have even come really close to actually breaking through the 100 grand mark, falling just $1 short back in April. So to some observers, the $100,000 COE was really only just a matter of time.

CarBuyer calmly explains how the COE system works

But what have been causing COE prices to drive through the roof? If you've read our COE guide, you'll know that the COE system is a basic supply and demand system, and prices are essentially dictated by how many COEs are available, and how many buyers are clamouring for them.

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The former is determined by the Land Transport Authority (LTA), and we are in a cycle of COE quotas being depressed due to a fewer number of cars being taken off the roads, given that right now COE quotas are calculated using a one-in-one-out formula.

And because of this, the general trend of COE prices follow 1. the age of cars on the road and 2. a 10-year cycle, the lifespan of a COE itself.

As cars get closer to the 10 year mark, many owners chose to scrap them, and thus they exit the system, making space for a new COE/car.

In 2013, we had a situation with a lot of the car population being less than five years old. Fewer deregistrations equals fewer COEs, and thus prices went close to the $100k mark.

Five years on, those cars all became 10 years old and exited the system. So around 2018, we saw COE prices average below $50k the entire year. And another five years or so on, we are back at high prices again.

However, this time it's been compounded by what appears to be a seemingly insatiable demand from buyers. It's easy to draw this out, as LTA publishes the number of bids received for each exercise alongside the number of COEs available in each category.

In the latest round of bidding, Cat B saw a total number of 851 bids for a quota of 528 COEs available.

Compared that to the previous exercise in May, which saw 709 bids for the same amount of COEs available, and that represented a nearly 20 per cent increase in just a matter of weeks.

And keep in mind that each bid represents an actual customer order, because car dealerships generally don't tend to bid for COEs frivolously.

Part of the reason for the greater number of bids this round could be due to the three-week gap between the last exercise and the latest one.

When that happens, dealerships will naturally have more time to canvass for orders, and thus have more bids to place in the following round, driving up demand even further.

There could be a knock-off effect to come too. With 851 bids for 528 Cat B COEs in the latest exercise, this meant that there were 323 bidders who were unsuccessful in securing their COE.

These 323 bids will then enter into the next tender, who will again compete with any new orders that will be picked up over the next two weeks.

The quota available is unlikely to be increased from this round, as the next adjustment in quota is only scheduled to be announced in July.

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You will also have noticed that the headline $100,000 COEs are in categories where bigger, more expensive cars reside, and it therefore stands to reason that customers shopping for such cars tend to have more financial latitude as compared to someone shopping for a car in Cat A, which is reserved for ICE cars with engines that are less than 1.6-litres in capacity and output of less than 130hp, and electric cars with an output of less than 147hp.

By the very nature of the COE system, Cat B is also much more competitive, since that's where everything that doesn't fit into the Cat A criteria will be lumped into.

So you get cars like the Volkswagen Golf fighting for COEs with the Mercedes-Benz S-Class and even high-end supercars.

Given that spectrum of consumers, it's no surprise that these buyers will have no qualms with putting in bigger bids in order to secure their car.

If anything, it's really a reflection of the economic rebound that Singapore is experiencing post-pandemic, because it's not just cars that are seeing prices go up.

After two years in the doldrums, it seems that consumer spending is now back with a vengeance. Nearly everything else, from property to petrol and even chicken rice, is also experiencing the effects of inflation, with supply, curtailed in some instances, being unable to keep up with demand.

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Generally speaking though, COE prices tend to be reactive, and all eyes will be on the next tender to see whether prices will dip in response to this record-breaking round.

CarBuyer's guess? The COE bidding market is always intensely reactive, and we are quite sure the next round will see Cat B/E premiums go back below $100k, but probably not by much.

Earlier this year, we speculated that COEs wouldn't reach such a high because, ironically, of cheapskates.

But judging from the way that premiums have been heading, as well as sentiment from the ground, it might not be so shocking to see COEs cross the $100,000 mark once again in the near future.

This article was first published in CarBuyer.