Anticipating the effect of COVID-19 on COE prices

The Land Transport Authority has announced that Certificate of Entitlement (COE) bidding exercises has been suspended for April.

What effect will it likely have on May COE prices, and beyond? 

2020 has already proven to be a relatively slow year for the car industry. The total available COE quota for the February to April period has shrunk by about 30% compared to the same period in 2019. Across the board, the number of COE bids has also dropped by around 43% compared to the same period in 2019. 

With the drop in demand outpacing the drop in supply, COE prices have fallen accordingly. 

In all likelihood, the COE prices in May will likely see a small drop, not unlike the trend we've been seeing from January to March. This is because there will likely be some carry over effect from March, with some dealers having to fulfil outstanding sales agreements with buyers. As such, we expect COE prices in May to continue to hover in the low $30,000s. 

This downward trend is a reflection of the economic sentiment in the country. On the back of the current COVID-19 situation, it is fair to expect the economic situation to continue to worsen.

Mr. Nicholas Wong, General Manager of Honda Authorised Distributor Kah Motor, tells us, "With the closure of the showrooms and the putting off of the COE, sales would definitely be impacted. It easily wipes one month of sales off the calendar." 

Hence, the effect of this one-month 'circuit breaker' period will likely be more intensely felt further down the line.

With car sales effectively suspended for a month, and with a looming economic recession, it's highly likely that car sales will be significantly reduced in the coming months. Some buyers may cancel their current new car orders, but more significantly, many potential buyers will likely delay making such a big-ticket purchase until the situation has significantly stabilised. 

With COE prices likely to fall, drivers who have cars reaching the end of their lifespan will be more inclined or incentivised to renew their COE. This will further negatively impact new car sales. 

With an anticipated significant drop in new car sales, COE prices in upcoming months will likely continue to fall on the back of low demand. In all likelihood, it may well fall into the $20,000 range.

Some questions remain. This suspension of the COE bidding exercise will logically result in unused COE quota for the month of April.

As Mr. Wong highlights, "Another question would be what about the excess COE in April that is not being utilised since it is based on a quota system? Does this mean that this month of entitlement will be reaped back to the market? If this is so, then the overall impact for full year sales will not be as bad." 

There also remains questions about the impact on the Prevailing Quota Premium, as well as when COE bidding will resume. Greater clarity on these matters will likely only be available in the comings weeks.