September 27, 2018 , 9:38 pm
The average person thinks it is a good thing when COE prices drop. Indeed, it may a good thing for some and especially beneficial to those that are first-time buyers and to some extent to those whose vehicle is due for scrap within the next few months. However, the same may not apply to those who own a vehicle with a longer residual life span, be it a 2 year old vehicle or 6 year old vehicle. If you are the owner of a 3-4 years old vehicle, and COE prices drop, you will be losing more than the original depreciation amount.
Why?
Be realistic.
Example: Let’s say 2 years ago you bought a brand new car X at $100,000 with a PARF return after 10 years amounting to $8,000 and a COE of $45,000.
What happens when the COE now drops to $25,000? It means the same brand new car will be selling at $80,000. How much is your 2 year old car X now worth? One may be tempted to think it is worth $80,000 or even higher if you include your PARF return into your yearly depreciation calculation. But can you sell your 2 year old car X at $80,000 when a brand new costs the same? The answer is NO. Most likely you may be able to sell your 2 year old car X in the range of $55,000 to $58,000. The truth hurts, and so does reality. Worse is: whether you sell your car now or later, you will still incur a big loss because buyers would prefer the newer car, with a lower intrinsic depreciation and therefore lower risks. It is definitely a painful decision to make but sometimes one must choose between the lesser of the 2 evils and in this case, decide to cut losses. For 2 years you will effectively incur a $45,000 loss, which amounts to a straight forward depreciation of $22,500 annually!!! So is it a good thing when COE prices are going down? Whether it pertains to buying or selling there are no numbers to calculate when it comes to the market forces of demand and supply.
So WHO will benefit?
1) First-time buyers
2) Existing owners whose vehicle is due for scrap
3) Existing owners whose vehicle have initial COE of $70,000 to $90,000
4) Existing owners who understand the automotive market and all price components of vehicles and plan accordingly to either maximise their current and future investment or cut down their losses
First-time buyers
For first-time buyers, it is very straight forward as they have nothing to lose. Their main concern is whether to buy a brand new or pre-owned vehicle and which vehicle best suits them. While some new car agents will have a surcharge if there is no trade-in, the main consideration will still be whether first-time buyers understand the market forces and are fully aware of the current and future impact of changes to price components of the vehicle. Without this understanding and awareness, careful planning and risk assessment cannot be made and any decision may lead to unplanned, harmful consequences that are hard to reverse.
Existing owners whose vehicle is due for scrap
Existing owners whose vehicle is due for scrap will also benefit when COE prices are going down as they have nothing much to lose given their existing car price is based on scrap value. Then again, the question is which car to change to. Which car suits their needs and budget and will be a financially sound investment.
Existing owners whose vehicle have initial COE of $70,000 to $90,000
For existing owners whose vehicle carry a higher COE of $70,000 to $90,000, it does make sense to change your car as the retail price of existing vehicle remains high, meaning your existing vehicle intrinsic value does not drastically fall and the effect on you is not as detrimental. As such, if you understand the automotive industry and price-related components, this will be a good time to either cut your losses/future losses or change to a cheaper yet better alternative that allows you to plan for the future while minimising your risks.
Existing owners who understand the automotive market and all price components of vehicles and plan accordingly to either maximise their current and future investment or cut down their losses
Should you not fall in the above 3 categories, all is not lost. There are still solutions our there to properly plan and manage your investment, be it cutting your losses or better forward planning. Instead of working to maintain your car, make the car work for you! Failing to plan is planning to fail. If you do not understand how the automotive market and its price components work, do come to us for advice. Following the crowd when one’s personal circumstances differ will not necessarily benefit you! Ask us and do not be your own doctor! If you get it wrong at the time of purchase, rectifying it may prove costly.
THANK YOU FOR READING!
If you still need any help or advice, please reach out to us directly at our Facebook Page. Our Car Specialist will help you better understand this without any sales antics. 😉