Car loan curbs: What were they meant to achieve?

Amazing the amount of happiness this policy has gennerated!

The Straits Times
www.straitstimes.com
Published on Mar 02, 2013
Car loan curbs: What were they meant to achieve?
Unclear if aim was about financial prudence or cooling COE prices

By Christopher Tan, Senior Correspondent

THE car loan curbs announced on Monday by the Monetary Authority of Singapore (MAS) are befuddling from a policy point of view.

What exactly is the MAS trying to achieve by restricting car loans to 60 per cent of purchase price and repayment period to five years, after a decade of deregulation?

The authority said the restrictions are "necessary to encourage financial prudence among buyers of motor vehicles". In the same breath, it added that the curbs do not apply to loans for commercial vehicles and motorcycles.

Is financial prudence not important for buyers of these vehicles?

It is equally confusing when we consider what the authority, in lifting the previous set of car loan restrictions in 2003, said.

To recap, it said car loans formed a small proportion of financial institutions' total loan portfolio - which is still generally the case today. It added that the level of non-performing car loans was also low. Again, defaults are still relatively low in relation to the number of loans disbursed, even if there is anecdotal evidence of a rise in absolute numbers.

Granted, policies should be reviewed over time to ensure they remain relevant. But the MAS should expend a bit more effort in explaining the change in policy. For instance, give concrete evidence of the damage that an unregulated car loan market has done, or explain why it might now be concerned about it.

The late deputy prime minister Goh Keng Swee - who helped set up the MAS - believed in this. In his book The Economics Of Modernisation, he noted the importance of communicating and explaining policies - no matter how complex - clearly.

As it is, we can only guess at the MAS' real purpose in imposing its latest measures.

Are the curbs aimed at cooling the overheated certificate of entitlement (COE) market? This is the popular theory. In fact, in an appeal to the MAS, motor traders argued that used cars do not contribute to vehicle population growth or influence COE prices, and thus should not face the same punitive curbs. The traders have a valid point.

In any case, will the curbs cool COE prices, which are now near record levels?

In January last year, Deputy Prime Minister Tharman Shanmugaratnam told Parliament the previous loan restrictions (effective from 1995 to 2003) were "not very effective in influencing COE prices". He added that car loans granted by financial institutions do not pose a threat to financial stability, as they formed a "very small proportion" of total consumer loans.

Obviously, there must have been a fundamental shift in thinking in the last 12 months because, now, the MAS feels car loans must be controlled.

While the merits of prudence are well accepted, should the state be enforcing a responsibility that is considered by many to be personal?

And assuming individuals are spending beyond their means, the banks - with their layers of due diligence, governance and financial discipline - will not disburse money to folks whom they feel are credit risks. Especially after the 2008 sub-prime debacle when banks were over-indulgent.

These policy posers aside, the new rules will have profound and immediate implications for car buyers and sellers alike.

First of all, the financing curbs will be another blow to an already heavily regulated market (the car market has been controlled by a slew of hefty taxes since the 1960s and the vehicle quota system since 1990). This time round though, the impact will be felt more by financiers, as well as motor companies and employees who have come to rely on loan commissions.

On the other side of the fence, consumers will also take a hit. The biggest impact will be felt by the less well-off, as well as those who do not have huge amounts of cash lying around. A check with industry players reveals that the majority of non-luxury car buyers take up loans of 70 per cent or more, spread over seven years or longer.

The figures are even higher for used-car buyers.

Will car buyers see relief in the form of a COE price drop? If there is a premium drop, many should have a tangible gain - if the cars they buy are those with open-market values (OMV) that are $20,000 or less. That's because a newly introduced tiered Additional Registration Fee (ARF) scheme will raise the purchase price of cars with higher OMVs.

Will there be a meaningful correction to COE premiums? Logically, COE prices should retreat in the near to medium term - if nothing else, then from the shock effect of the loan restrictions and ARF hike. If so, lightly geared buyers of budget cars should come out of recent developments with a smile on their faces.

But given the tight COE supply (which is expected to remain tight for another year or more) and Singapore's growing population, premiums are unlikely to stay depressed for a prolonged period.

For COEs to remain "reasonable", a number of long-term measures need to be in place. As simplistic as it sounds, top of the list is curbing demand - by monetary as well as non-monetary means.

Right now, we are relying too heavily on the former. As the market has amply shown, demand for cars remains strong even though prices keep heading north.

Clearly, steps will also be needed to curb demand for cars via non-monetary means. Again, the obvious thing to do is to have an excellent public transport system. Alas that is not quite the case yet,and getting there is going to take some time.

Less obvious is to make driving less of a joy. Perverse as that sounds, that is effective in showing the demerits of car ownership. That is precisely what many cities do.

Singapore, however, has a strong aversion to congestion and keeps building and widening roads and ensuring there is ample parking. On the other hand, it curbs loans to reduce demand for cars. Surely, a rethink is in order here.

christan@sph.com.sg

Quote:For COEs to remain "reasonable", a number of long-term measures need to be in place. As simplistic as it sounds, top of the list is curbing demand - by monetary as well as non-monetary means.

Right now, we are relying too heavily on the former. As the market has amply shown, demand for cars remains strong even though prices keep heading north.

Clearly, steps will also be needed to curb demand for cars via non-monetary means. Again, the obvious thing to do is to have an excellent public transport system. Alas that is not quite the case yet,and getting there is going to take some time.

Less obvious is to make driving less of a joy. Perverse as that sounds, that is effective in showing the demerits of car ownership. That is precisely what many cities do.

When driving is unpleasant, people will choose not to drive even if they can afford it. However this type of measure directly impacts revenues (COE, PARF, ARF, road tax etc). The savings on the LTA end (fewer roads, fewer car parks etc) are not so easily quantified.

In life, what gets measured gets done. It is easy to measure the revenues from taxes. It is not so easy to measure the savings from not spending. Hence the former gets more attention than the latter.

Problem is how do we segregate those who NEED a car from those who buy a car for the STATUS?

The Straits Times
www.straitstimes.com
Published on Mar 06, 2013
'Relook loan curbs for those who really need cars'

SPARE a thought for those who have a pressing need for cars but have now been priced out because of new loan curbs, two MPs said yesterday.

Ms Jessica Tan (East Coast GRC) and Mr Lim Biow Chuan (Mountbatten), who termed the changes "sudden" and "drastic", highlighted the plight of those who genuinely need cars but now cannot afford them.

Ms Tan called for a relook, taking into consideration "needs- based car ownership".

This would cover families who take public transport, but would like the flexibility of a car because they have young children and elders. She used the example of a Mazda 3 or a Toyota Altis, which fall into the range of cars with open market values below $20,000, and hence will not see any increase in Additional Registration Fees, also announced last week.

But with the new financing restrictions, buyers still have to fork out $50,000 cash upfront, as such cars cost about $130,000 to $140,000 each after taxes and certificate of entitlement premiums.

Loans are now capped at 60 per cent of a car's price, and need to be serviced within five years.

Previously, buyers could take loans for up to 100 per cent of the purchase price and stretch the tenure to 10 years.

Ms Tan, who kicked off the Budget debate yesterday, made an impassioned pitch to Deputy Prime Minister Tharman Shanmugaratnam: "I will say to you that there are people who do need to own a car on a needs basis rather than for luxury."

Mr Lim said it would be better for the authorities to revert to the car loan limit of 70 or 80 per cent, which was the rule a decade ago.

He proposed that the financing limit be set at 70 per cent for all cars for a maximum of five years.

LEONARD LIM

Even if there are people who genuine NEED a car, I am sure these formed a very small group of people as compare to those who WANT a car. If we relax the rules to before, those who WANT a car will benefit more than those who NEED one. I feel that these MPs are just trying to score political point.

It is the drastic increase in population that causes the jump in COE.
With the huge increase in COE, comes the need to curb the financing.

They created the root problem and now, they try to solve the side effects of the it.

Populist bs coming from pap mps? I rather they say frank and unkind things like inderjit singh but obviously with the welfare of the nation in mind.

They care for the people ?

Cfa. Do u know for sure? U must know something.

Personally speaking I volunteer at meet the people sessions and for me at least you dont do things like this w/o a heart and i can see the work they put in. So there. Its popular and fun to bash pap mp on internet but i cant do it in good conscience.

(06-03-2013, 10:24 AM)godjira1 Wrote: Personally speaking I volunteer at meet the people sessions and for me at least you dont do things like this w/o a heart and i can see the work they put in. So there. Its popular and fun to bash pap mp on internet but i cant do it in good conscience.

As a fellow singaporean, thank you for volunteering. I personally has friends who are PAP volunteers and do believe that many sincerely serve from their hearts. I also have many friends (much more actually) who support the oppositions. I don't see the need to constantly bash one side or the other.

Interesting article from cnbc attached below – written from a US perspective I think. Note the criticism that Singapore’s public transport system comes in for and the comparisons with automobile prices in the UK and the US……..………

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World's Most Expensive Car Market Just Got Pricier

Published: Tuesday, 5 Mar 2013 | 11:17 PM ET
By: Rajeshni Naidu-Ghelani, Assistant Producer, CNBC

It's already home to some of the world's most expensive properties and considered one of the most costly places to live in. Now, this Southeast Asian island state of Singapore is also one of the priciest places to own a car. Recent cooling measures for the car market that include increasing the minimum down payment for a car to 40 percent, plus capping loans at five years from the previous 10 years together with a hike in registration fees have priced many households out of the car market.

Despite the fact that the wealthy financial hub has one of the highest per capita incomes in the world, there are few who can afford to buy a new car at present. "It's out of my reach, very far away," said 43-year-old Andy Siew, a personal trainer with a monthly household income of S$12,000 (US$9,650). "Any couple earning within that region cannot afford to buy a new car right now."

Before the recent moves, the cost of buying a vehicle in Singapore was already very high compared to other developed economies. Anyone who wants to buy a car in Singapore has to first obtain a certificate of entitlement (COE), which gives them the right to own and drive a car for 10 years. The measure was introduced to limit the number of cars in the city that has an area of just 276 square miles. Currently, the average cost of buying a COE is around S$87,000 (US$70,000). The COE, for example, hikes the total price of an average sedan like a Toyota Corolla Altis to almost US$120,000 in Singapore, compared to neighbouring Malaysia where the same car starts selling for about US$34,000. The latest Corolla models in the U.S. start at about US$16,000, and US$20,000 in the U.K.

Pricing Out Buyers
Mohit Arora, Asia-Pacific executive director at market research firm J.D. Power and Associates says the latest measures are pricing out the average buyer in what was always a tough market. "Anywhere in the world owning a car is the announcement of coming to a particular status in society. I think this is going to become harder for an average Singaporean," said Arora.

Even at the higher end of the market, car buyers are feeling the pinch owing to the latest curbs by the government. A salesperson at a luxury car retailer in Singapore, who did not want to be identified, told CNBC that since the measures were introduced last week, it was becoming a "really uphill task" to find buyers. "The general mentality at the moment is that if I have SDG$100,000 cash - I wouldn't fork out that much for a car, maybe I'd rather buy a property," said the salesperson at the dealership of high-end cars where average prices hover around SGD$200,000.

While the government's latest moves are an attempt to reduce household credit risk along with further controlling Singapore's more than 965,000 car population, it is also squeezing out marginal buyers, according to Vishnu Varathan, market economist at Mizuho Corporate Bank. "The hit will probably be higher on lower income households given that lower income households are less likely to have a disposable $50,000 to buy an average car," Varathan said. "Arguably, quality of life for the overall population has declined given all the transportation woes that we see."

Singapore boasts of world class infrastructure but as the city has grown from 4.2 million to 5.3 million in just 10 years, it has led to overcrowding in trains, buses and on the roads. The government plans to boost the city's public transportation system to encourage less people to drive, but analysts said until those increased services become available, it will impact people's mobility. According to Arora, Singapore does not offer the kind of alternate public transport that is available in other parts of the world like Tokyo where you can implement such kind of highly restrictive policies. "Our transport system is not exactly that good, the infrastructure is not catering to us right now," Siew, who lives in Singapore's northeastern suburb, said. "The trains and buses are not on time, and taxis are so difficult to find sometimes, especially, on rainy days and peak hours."

As the burden on the city's transport system increases, owning a car for some becomes a need more than a luxury. Forty-year-old Mike Tan, who has to travel a lot being a salesperson, is relieved he bought a brand new car a month ago before the tightening measures were introduced. "If the policies came into effect before I changed my car, I probably would have kept my old car until the end of my COE," said Tan.

But Siew was not that lucky. He would have liked the "luxury" of replacing his seven-year-old Hyundai Avante with a new car as the COE on it expires in three years and will cost him more than $72,000 to renew. But now he may have to even give up on owning a car altogether.

—By CNBC.com's Rajeshni Naidu-Ghelani
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