But why would having more COEs to sell result in no change in car population? This part, I don't understand. Sorry, I'm not a car owner and have not looked at the car market, so perhaps you could explain this part in more detail to hapless souls like myself.
Ok. Let me explain. The COE system is set up like this. Every month there are 2 COE biddings. The quota is set by the growth rate (currently at 1% per annum) + whatever cars was deregistered in the past six months (pro rated). 1% per annum is really little compared to the supposed 10% of cars that should be deregistered every year because of COE expiry. (COE last for 10 years so on the average 10% of the cars should expire every year).
The big problem is you DON'T have to keep you COE for 10 years. When COE prices fall, you can scrape your car, get some COE rebate and bid for a NEW COE. Example, if you bought your COE in 2003 for 40k and when COE drops to 10k in 2005, it make sense to scrape your car because you can get back $32k just from your COE and use those money to buy a brand new $10k COE+car.
When you scrape your car, your COE get rolled back into the system within months. This is thus a big problem. In 2001-2004 the COE prices were very high but it dropped a lot in 2005. EVERYONE who bought a COE in 2001-2004 scraped their car and bidded for a new COE in 2005-2006. Those COEs that were launched in 2001-2004 got added back into the pool in 2005-2006 further forcing the prices down.
While low prices looked good at that time, it caused a BIG problem 10 years down the road as all the COE that is supposed to expire in 2011-2014 is all gone. Even if the COE prices rocket up, it does not really help as everyone's COE has not expired yet. All it does is to restrict demand and does NOTHING on the supply side. (frankly, someone should have foreseen this problem at that time)
Introducing COE rebates pegged at a percentage(discount) of todays price, allows rising COE prices to encourage people to GIVE UP driving and return the COE back to the government. By allowing Government to buy back COE from WILLING SELLERS, this allows the government to take some cars OFF the road, and thus able to introduce new COEs without increasing the car population.
The government then sells the COE to the next happy buyer at todays prices and makes some money.
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