Tan Kin Lian's Blog: Escalating COE prices

Saturday, April 17, 2010

Escalating COE prices

The COE prices has increased sharply due to a reduction in COE available for bidding, and has been exaggerated by greed and fear.

We have to accept that COE prices will be high, due to limited supply and high demand, but we should try to avoid the large fluctuation in prices caused by the current bidding system. The system should be changed to reduce the volatility.

Some people have suggested the "pay as you bid" approach. I think that it has merits. The other change is to make it easier for consumers to bid for COEs directly, instead of relying on the motor dealers to do the bidding. Their profit on the COE increases the cost of ownership.

A better long term strategy is to reduce the demand for private car ownership by improving public transport and the use of taxis.

We have to improve the feeder service to bring commuters from their homes to the MRT stations or bus interchanges. The feeder services should have a waiting time of less than 5 minutes and be affordable (say 40 cetns).

We should also reduce the cost of taxi fares and increase the supply, so that more people can use taxis instead of cars. Each additional taxi on the road can reduce the demand for cars by 5 to 10 times. The cost of taxi fares can come down by reducing the taxis and levies on taxis and by removing unnecessary regulations that add to the cost of operations. If more people uses taxis instead of private cars, there will be less demand for parking spaces.

Tan Kin Lian

18 comments:

Anonymous said...: This reminds me of the old Zen philosophy question.

What sound does a falling tree make in an empty forest?

Answer
======
Empty forest implies no living creatures around.

No living creatures means there is nobody listening.

So the falling tree makes no noise.

Singapore is not an empty forest of course. But deaf frogs seem to be the dominant species here.; April 17, 2010 7:49 AM
Singapore Short Stories said...: Will the rising COE prices lead to more Singaporeans switching to public transport?; April 17, 2010 8:06 AM
Anonymous said...: With higher petrol prices these days and the introduction of the Circle lines in operation, we can surely curb the car population.
I've given up my car for now!; April 17, 2010 10:37 AM
indexer said...: I would not agree that "pay as you bid" is a better system. In fact, I would say it is clearly worse for individuals, as they have little knowledge of the COE market, and would not know the right amount to bid. They are much more likely to overbid or underbid. Dealers would also suffer because of the additional complexity. And what about the long-term effects--a car with an expensive COE is much more likely to be scrapped earlier than another with a lower COE, which was registered at the same time. And in the end, auction theory shows that despite the increased complexity, there are likely to be no change in the winning bid amount. Better to stick with the current system, where everyone can just bid exactly what they are willing to pay. http://www.beyonddiscovery.org/content/view.page.asp?I=3685

I would not agree that COE prices are inflated because car dealers "make profit" from COE. The COE is an asset. When you hold it, you assume risk--its value can go up or go down. This price movement risk must go somewhere--if a consumer holds the COE, then he assumes the risk. If the dealer holds the COE, then the dealer assumes the risk. What we have in Singapore is that dealers are willing to assume this risk in order to sell their cars. If you go to any dealer in Singapore, they will always offer you a better deal for them to bid for the COE on your behalf, because they make profit on the car. And this is a willing buyer, willing seller relationship. Often, it is better for the buyer to transfer the COE price risk to the dealer. Usually, there are two ways to do so: "guaranteed COE", and "non-guaranteed COE". If the buyer wants a guarantee, meaning less risk, then he must be willing to pay for it.

Assuming that the customer has paid for a car with a "guaranteed COE", he has now paid the dealer for the service of securing the necessary COE. When the COE price moves in the next auction, we must not think that the dealer has "profited" when the COE price goes down, or that the customer has "profited" when the COE price goes up. What has happened is that the risk has been willingly transferred from the customer to the dealer.

A good question to ask is whether market forces are allowed to operate freely in the local car industry. The customer can take his pick of many dealers, and parallel importers, to find a product and COE arrangement that would best meet his needs.

Another good question to ask is whether the current COE bidding system is accessible to individuals. This is addressed in Mr Tan's other recent post. But we should not assume that just because individuals are bidding instead of dealers, that there would be reduced volatility in COE prices. This is a proposition that remains to be proven.; April 17, 2010 12:28 PM
anti-car said...: Well said, anon 7:49am!

To anon 10:37 and Spore short stories

Less cars? no way!.. its a symbol of status and wealth.. a slight drop perhaps, but I wouldn't bet on anything significant.
Give up the car.. with 10K, buy shares instead.. it pays for your bus & taxi rides ( at least subsidises the cost & potentially capital appreciation, as for the car: absolute depreciation, and rising costs)

Now, if only the LTA would list ERP on the SGX... imagine.. dividends of 8% above!; April 17, 2010 12:37 PM
jamesneo said...: In some of the mrt stations for etc Serangoon MRT to say hougang Ave 1 there is no feeder services. The bus 53 plies from bishan mrt to changi airport passing through a bus stop opposite the serangoon MRT. In a lot of this cases, unless they are going to increase the number of routes significantly, these long plying buses are still an important part of the system.
I believe increasing the frequencies of this bus might be better in certain case than relying on another feeder service. Many of the other bus number also are similarly from other interchanges from far away and goes to various places .

Unless we have some sort of new transport system, not all of the mrt stations could have a feeder service but is actually serviced by a long plying bus that goes to a lot of places.; April 17, 2010 1:44 PM
Anonymous said...: The wild fluctuations of COE prices is a BIG problem for car buyers and dealers alike. The past results has shown that they were extremely volatile. This is the typical result of the current bidding system i.e. everyone pays the lowest successful bid. It encourages and rewards people who bid irresponsibly as they would only need to pay the same amount as everyone else. When the supply is low and price is raising, more people would bid at a price level much higher than they are willing to pay to ensure that they get the COE. The result is a sudden jump in COE prices. The usual "pay as you bid" system would address such a problem very effectively. Surely the government understands this and knows the ill effect of the current system but I don't think they would change it because higher prices means more tax revenue. The excuse that the current system is fairer to all the bidders is nonsense -- we all know why they won't change it.; April 17, 2010 3:32 PM
Anonymous said...: I think the COE for passenger cars should not be divided into categories. It should be just one big pool and bidding could be on a per cubic centimeter (c.c.) basis. Your final COE price would be that multiply by the engine capacity. That way we are truly taking care of small car buyers -- just like the current road tax system.; April 17, 2010 3:50 PM
Anonymous said...: Hi ALL,
No matter what is the cost of our future COE,Singaporean will still own cars.The present transport system is still lacking.Imagine so many years had passed since the introduction of Restricted Zones and now COEs,there are more vehicles on the roads.Bear with it if one wants luxury but I do hope that one day our own ppl will come out with a good solution to do away with COEs and yet Singaporean can enjoy smooth travelling on the roads without the hassle of wasting time waiting for public transportations.Our new generation has great potential in designing new concepts to tackle the current shortfalls.I'm hoping that this days are near,be positive.

Curry puff; April 17, 2010 4:02 PM
Wayne said...: Hi Mr Tan,

(1) On public transport: one way that would really make me give up driving would be the extension of MRT (+ feeder bus services) operating hours to perhaps 2am or 3am.

(2) On car ownership, I think "financial counselling" should be in place, example, before buying the car, the car dealer must put up the estimated monthly cost of operating the car (season parking and outside parking, ERP, roadtax, maintenance, petrol, repairs etc) for the buyers to see as a caveat of sorts. If all these costs add up to less than or equal to xx % (affordable level) of the buyer's monthly take home pay, then it is recommended to proceed. Or at least I think it will make buyers think twice.

(3) On car loan, I find that dealers tend to push longer tenure loans (probably higher commission). And they often emphasize there is PENALTY (why?) of S$x,xxx should you take a shorter loan tenure. I find this disturbing and similar to insurance agents/ financial planners not disclosing certain important aspects of the financial products (whole life policy, mini bond etc).

(4) Incentive: One way to encourage long term car ownership can be something like this: If the new car was bought brand new (first hand) and the owner use it throughout the 10-year period, then an incentive can be given to the owner to either extend (renew) the COE or get another car. This way, we may have lesser activities in changing cars and driving up transactional costs.

===========

To anti-car, I suppose you have stocks of SMRT and Comfort? :-P It is so true that the monthly installments sunk into my car is so "wasted" as they could be fetching dividends instead. -- sigh --; April 17, 2010 4:11 PM
indexer said...: @Anonymous April 17, 2010 3:32 PM

"When the supply is low and price is raising, more people would bid at a price level much higher than they are willing to pay to ensure that they get the COE."

This is illogical. People should only submit a bid that they are willing to pay.; April 17, 2010 7:45 PM
symmetrix said...: Car ownership provides convenience and is a status symbol (as many bloggers have mentioned). It is not a question of whether it is worth it to own a car. (We know that it is a depreciating asset, a liability). It is a question of whether you can afford it. And just like how HDB flats are "affordable", cars can and will be "affordable" too.

COE price increase is not going to make much difference to car ownership. Neither is the price of petrol. We have been there before, with $100k COEs and $2/litre petrol prices. Ask youself whether the car population or car usage has decreased due to these factors? Well I don't see any noticeable difference. I predict car population may still increase with pricer COEs, just like how house buyers are chasing prices up.

There is a certain group of potential car buyers that will buy a car no matter what (eg to take kids to school, visiting grandmothers, family outing with maids, showing off to girlfriends etc). There is a 2nd group that will not buy a car no matter what (eg no driving licence, hate traffic jams etc). Then there is a 3rd borderline group who may buy a car only if the factors are in their favour (eg $2 COEs, petrol and parking fees drop etc). This is the group that will be affected by rising COEs. The govt is hoping that this 3rd group will join the 2nd group as COE prices increase.

Improving public transport will only have a small impact on reducing car population. Though our train network has widened, there is still widespread overcrowding in them.

To wean ppl away from cars onto public transport, the govt should consider the flwg:-
1. Reduce the human population. The govt will disagree with me on this.
2. Provide state-sponsored free public transport around the city area. Hey, it works in Perth.
3. Eliminate overcrowding in train and buses. There are only a few occassions in Perth when I had to stand in a train or bus. Some bus drivers will deny pax to board when the bus is full. This ensures pax comfort and safety. Can S'pore try to do at least some of these pls?; April 17, 2010 10:41 PM
Anonymous said...: @indexer

"People should only submit a bid that they are willing to pay."

I like what you said, but what you said would be true only if the "pay as you bid" system is adopted. "People should only submit a bid that they are willing to pay" doesn't mean that they "would". The logic of the current system is that if you must get the COE at any cost then you bid "DOUBLE HIGH"; that would basically guaranteed that you would get the COE based on the past statistics. These people are not worried since they only pay as much as the minimum successful bid. When the demand far exceeds supply, more people would bid this way as the longer you wait the worse it becomes. As a result the prices get extreme sudden jumps from time to time. This is bad for car buyers and dealers but heaven for the speculators! It is extremely unproductive since the speculators not only do not add any value but cost the buyer more money and give the government a bad name. In spite of that, the government doesn't seem to mind since they help generate extra tax revenue. I believe that the most effective way to fix the speculators is to fix the system!; April 17, 2010 11:28 PM
Anonymous said...: Dear Mr Tan

I have some thoughts on what I believe could be a more socially equitable and environment friendly way to manage the COE system and would like to bounce them off you.

1. Bidding by individuals only rather than car dealers.

2. COEs non-transferable (ie. unless attached to a car of course).

3. COEs bid on a per cc. basis.

4. Final COE amount payable multiplied by a function of the actual cc. of the car purchased, and the car's wheel base (ie. embed a social tax for bigger cars to account for the environment and land scarcity).

5. If COE is not used within 6 months, successful COE bidder to pay a penalty (eg. calculated based on the notional purchase of the best selling car of the month) to encourage serious buyers only and discourage capricious bidding.

6. Unused COEs are recycled into the following month's bidding as integrity of overall quota is maintained.

7. Every subsequent car after the first car of every household (ie. based on residential address) to be charged a premium on the COE (eg. COE plus 10% for second car; 15% for third, etc.)

Thank you in advance and best regards.

M Lee; April 17, 2010 11:44 PM
Sylvester Lim said...: Hi Tan KL, I do not agree that we have to accept high COEs. I think that the COE can still be used to control the car population without resorting to high fiscal methods by resorting to a ballot system based similarly to the HDB system as well as a based on priority. A two tier system can be adopted, one tier based on ballot & every one can apply every 3 years & no transfers allowed & a 2nd tier where you pay as you bid.

I agree your points about improving the public transport system. On the taxis, return back to issuing private taxi licenses without the middleman like the current taxi companies. Let taxi drivers own their cabs.; April 18, 2010 1:01 AM
Anonymous said...: M Lee

Also like to suggest that an additional tax to be levied on on second car and above under same household address for a fairer level playing field for all bidders.; April 18, 2010 7:43 AM
Tan Kin Lian said...: Hi Sylvester Lim,

I like to agree with you that COE prices need not be too high. Your suggestion of balloting can be a way out, but it may need to have restrictions on resale of the vehicle, similar to the restrictions on HDB flats in the old days. It can work, but it needs a new type of government philosophy.

A better approach is to reduce the demand for private cars by making public transport more accessible and comfortable. Most major cities in the West are fairly successful in this respect. Singapore, and many Asian cities, are quite backward in this respect.; April 18, 2010 8:01 AM
Anonymous said...: We have been down this road so many times before: open bids, closed bids, only buyers can bid, no transfers.. etc

Cars emit C02. its carbon dioxide.
and it gets worse every day.

All the money earned should go into advertising that cars are not cool to have.. its uncool to be a politician driven in a mercedes and whizzing down orchard road.

But it will not happen bcos Governments all earn revenue related to cars.. petrol, ERP, fines,tax,and it creates jobs.. repair workshops, insurance and as a leverage tool in trade negotiations..

The car will stay for a very, very long time.( it replaces the horse,donkey,mule,goat, cow )a symbol of wealth.; April 18, 2010 4:52 PM

Saturday, April 17, 2010

Escalating COE prices

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