Shopping for new car? Hold on

Folk shopping for a car in recent months must be in despair. Prices of new cars have skyrocketed, rising by about $20,000 in just two months, before softening last month. The increases follow spikes in Certificate of Entitlement (COE) premiums, which came on the back of a drastic reduction in COE supply. The current quota is 40% smaller than last year's.

The bad news for car buyers does not stop there. The next quota, to be announced in August, will, in all likelihood, experience a further shrinkage. This is because motorists are likely to hold on to their cars due to the sharp rise in prices. Those who sell will probably see their cars end up in the secondhand market instead of being scrapped or exported.

Going by estimates based on deregistrations in the first three months of this year, the monthly quota for August could dip to 3900 from about 4250 now. That means COE premiums should continue to head upwards, leading to even fewer deregistrations in the second half of the year.

Right now, this downward spiral in supply and upward spiral in prices will seem quite frightening to anyone in the market for a new car. Will it ever end? Will the trend ever reverse? More pertinently, how much higher will COE premiums go?

COE premiums do not rise continuously. There will be corrections. We have seen two rounds since things began heating up in April's second tender and last month's first. The open category, which hit $49,000 during the first tender in April, has dropped to $39,000. But while there is intermittent respite, premiums will be on the uptrend. There are fears that premiums will reach $100,000, which happened in 1994.

However, the $100,000 premium, which was for cars above 2,000cc, was largely the work of speculators. When anti-speculative measures were introduced, premiums plunged overnight. If not $100,000, then how far can COE premiums climb today? The highest premium on record for a 1,600cc car was about $62,000 in 1997. The ceiling for a big-car COE is not much higher, at around $75,000, also reached in 1997.

These two categories of cars are the mainstay of most buyers, so it is safe to assume that their peak COE premiums are what the market is willing to bear in the best of circumstances. However, times have changed profoundly since the 1990s. Also, the oversupply of COEs in recent years gave rise to an "oversold" market. In the words of a dealership executive, "everyone who wanted a car has already bought one".

The car population here ballooned by 30% in the past five years, and 85% of passenger cars on the road are less than five years old. With lofty COE premiums, new-car sales have slowed to a crawl in recent months. They will start to pick up when consumers become accustomed to the new rates. The norm for COE premiums in the immediate future is likely to be $25,000-$30,000 for cars up to 1,600cc, and $30,000-$40,000 for cars with bigger engines. Motor traders reckon that the premiums could reach $50,000 by early next year and, perhaps, $60,000 by the later part of next year. These are long-shot projections, though, and should be taken with a pinch of salt.

Bear in mind that the COE supply crunch should reverse in about two to three years' time, when the cohort of cars between four and five years of age become too old to be sold on the secondary market here and have to be scrapped or exported. This cohort is sizeable, at about 200,000 units.

The bottom line: If you are not in a hurry to buy a new car, hold on till 2013. However, if you absolutely need one soon, you might just have to bite the bullet, or you could shop for a used car.