FOLKS who aspire to own a set of wheels need not lose sleep over the Government’s planned cut in COE supply going forward.
From next year, the allowable annual growth rate in the vehicle population will be 1.5 per cent, instead of 3 per cent that has been in place since 1990.
Based on an expected car population of 550,000 at end-2008, a 1.5 per cent growth rate will yield 8,250 fresh COEs for cars. This would be more than what the 7,440 which the 3 per cent cap yielded in 1990.
Granted the competition for cars will be greater, since the population has grown considerably.
But replacement demand should slow down dramatically too. Replacement demand refers to demand generated by current car owners changing cars.
Because the car population is fairly young – with 80 per cent of all cars being less than four years of age as of last year, versus 30 per cent back in 1998 – replacement demand will not be all that hot in coming years.
Besides, many current owners are saddled with huge loans. Owners cannot redeem these loans without being sizeably out of pocket.
In the bigger picture, global demand for cars is expected to drop in the next two to three years, fuelled by the credit crunch and the devastating financial crisis that is sweeping the world today.
Already, car companies from Toyota to General Motors to Ford to Bentley have openly declared that they are cutting back on production, possibly for the next couple of years.
According to PriceWaterhouseCoopers analysts, recovery in the world automotive sector is unlikely to happen until 2010.
It said the economic downturn has affected the mature markets more than anticipated and its effect has now reached the emerging markets.
Vehicle sales in America have fallen to their lowest level in 15 years and are unlikely to return in the near future due to economic recession.
These factors can only be good news for prospective car buyers, as prices are likely to be soft in an environment of low demand.
The only element that some quarters reckon may hit buyers is the strong Japanese yen. The currency has gained some 15 per cent in the past two months against the Singapore dollar.
This, some motor traders point out, has raised the cost price of cars by between $3,500 and $5,000.
But whether sellers will pass the higher costs to consumers is quite another story.
Six years ago, a Monetary Authority of Singapore study concluded that car prices do not necessarily move in tandem with currency rates.
In its January 2002 Macroeconomic Review, the MAS Economics Department noted that the cost price of Japanese cars – which account for more than 60 per cent of cars sold here – was affected by yen movements.
But the impact stops there, largely because of the COE system, which it said "appears to have driven a wedge between import prices and the eventual consumer price in our market".
It cites the example of the Asian crisis period (1997-1999). Import prices surged with the weakening of the Singapore dollar against the yen, but COE rates, and consequently retail car prices, "fell sharply as consumer sentiments were poor".
The tenuous link between the state of the yen and the final selling prices of Japanese cars here has been pointed out by motor traders and industry watchers.
If the yen softens, a significant portion of the extra profit margin arising tends to go towards more aggressive bidding for COEs. If the yen firms, the tendency is for importers here to absorb the rise, at least initially, so as to maintain sales and protect market share.
But if a strong yen coincides with relatively weak European currencies over several months, the market share of the Japanese dips. For instance, in first-half 2000, their slice of the pie fell below 60 per cent. There is evidence to suggest that this had to do more with their distributors’ weakened COE bidding power than it had with uncompetitive retail prices.
Will the Singapore car market collapse because of the financial meltdown? Going by past recessions, unlikely. Again, thanks to the COE system.
Singapore Vehicle Traders Association president Neo Nam Heng said: "We have the COE system, where old cars need to be replaced. So the market will not collapse. We have a special system, a machine that keeps the industry moving."
Indeed, during the 18 years that the COE system has been in place, car ownership rate has risen from one in 11 residents in 1990 to one in seven today.
Cars have also become more affordable. Between 2005 and 2007, car prices fell to their lowest levels since 1990. The average monthly household income meanwhile had more than doubled to $6,830 between 1990 and 2007. While inflation had pushed up prices of practically all goods and services, some cars were as "cheap" as they were in the 1980s.
And Singapore’s car market is nearly five times the size of Hong Kong’s, despite the latter having nearly twice as many residents.
So, if you are in the market for a car, you have little to worry about. Except for rising running costs, that is.