Certificate of entitlement (COE) prices for all vehicle categories rose in the second round of bidding in August 2014 on the back of strong demand, despite an increase in COE quotas over the past three months. We expect this dynamic to continue playing out over the next few years as car owners gradually replace their cars that are nearing their 10 year lifespan, pushing up demand. In view of rising COE quotas, we are revising our vehicle sales growth forecast for 2014 from a contraction of 3.0% to 14.4% growth.
Expect Bumper Crop O f COE Quotas
COE quotas are determined by the number of cars deregistered in the preceding three-month period, and given that the number of cars deregistered monthly has hit a three-year high of 2,724 units in July, we foresee COE quotas continuing on their upward trend in Q414. We believe COE quotas will continue rising over the next few years. This is largely driven by an expected increase in the number of cars being deregistered from 2014 to 2018, as the bumper crop of cars bought between 2004 and 2008 are nearing the end of their 10-year lifespan.
Although car buyers are looking to replace their old cars, we also notice that car sales from January to August 2014 have drastically fallen short of the sales volume that was seen during the same period in 2004. We attribute this to car owners holding off deregistration of their vehicles due to the high cost of purchasing a new car, and opting to renew their COEs for another five years instead. This will result in demand being spread over a number of years.
A Different Picture For CVs
We see a completely different trend for commercial vehicles (CVs), with monthly COE quotas declining over the past months, from 770 between May and July to 515 between August and October. Although CVs also had a similar boom between 2004 and 2008, their longer lifespan of 20 years means that unlike passenger car owners, CV owners will not be hard pressed to replace their vehicles anytime soon.
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