$100,000 COEs? Car ownership scheme should be better managed

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#1
The Straits Times
www.straitstimes.com
Published on Mar 10, 2013
$100,000 COEs? Car ownership scheme should be better managed

No policy should result in arbitrary price movements with no relation to economy

By Han Fook Kwang Managing Editor

When I renewed the certificate of entitlement (COE) for my nine-year-old car in 2010, I paid the prevailing premium of around $20,000.

I kicked myself for not doing so a year earlier when the amount was $5,000. But when the price rose after I made the renewal, to $60,000 a year later, I thanked my lucky stars.

A colleague whose Volvo is almost 10 years old says she will scrap it as she will not pay the $90,000 required to renew its COE now.

Her husband's experience is completely different, and he has a wide grin on his face every time he tells how he renewed the COE of his Mazda for $3,800 in 2009.

Three very different experiences over the same piece of paper that confers the right to own a car in Singapore.

Should policy work like this, resulting in people paying so very different prices over so short a period?

So, how many ways are there to lower COE prices?

Answer: As many as there are to raise them.

Indeed, there are many ways because the COE is a piece of paper created by the Government which has almost absolute control of how it performs in the market.

Want to raise COE prices? Here are three effective ways.

One, reduce the supply of COEs - the fewer there are, the higher the price will rise as buyers compete more aggressively for the reduced supply.

Two, lower the other ownership taxes, such as the Additional Registration Fee (ARF).

What will happen is that car buyers will use the savings from the tax reduction to bid higher COE prices because they will assume all the other bidders will do the same.

Three, relax the lending requirements so that more people will be able to take up loans to buy cars because the monthly repayment is now within their budget.

What if you did all three? You should bet your last COE dollar that prices will hit the roof.

In fact, that's exactly what the Government has done over the last 10 years.

In 2003, it lifted car loan restrictions which had been in force from 1995.

In 2002, it reduced the ARF from 140 per cent of the open market value of a car to 130 per cent, part of a planned reduction in the tax which was brought further down to 100 per cent in 2008.

And in 2009, it sharply reduced COE numbers to slow down the growth rate of the car population from 3 per cent a year to 1.5 per cent, and to 0.5 per cent this year.

Should anyone be surprised then that COE prices exploded, hitting the $90,000 mark?

In its defence, each of these changes could be justified on its own grounds, as indeed they were. But taken together, it was a recipe to break COE price records.

It shows how important it is for policymakers to be clear about what they want to achieve and to be wary of unintended consequences.

In this case, I do not think the people who decided to relax the lending requirements in 2003 realised what a major impact it would have on COE prices by encouraging more people into the car market.

Perhaps the official attitude then was that it didn't matter how high COE prices rose. Weren't prices merely a function of supply and demand? No one was forcing anyone to bid those prices and if there were people willing to pay, who was to say they were wrong, or that the scheme wasn't working properly?

Indeed that was the reply given by officialdom whenever the issue was raised - it was market forces that determined the price.

In reality, it was bad policy.

Alarm bells should have sounded much earlier that something was seriously wrong when the price of a piece of paper conferring the right to own a car was fast approaching $100,000.

The earth should have moved at the Ministry of Transport when Category A COE prices jumped so rapidly over just two years, from an annual average of $11,600 in 2009 to $68,200 in 2011.

No policy should result in such arbitrary price movements that bear no relation to the economy. It is also terribly unfair for one person to pay more than six times what somebody else paid two years ago.

And it's no good saying it's the free market working because the COE market isn't free. It's created by government and determined completely by policy.

There's clearly a need to manage the COE scheme better to prevent prices from moving so arbitrarily.

Of the three measures I mentioned above, the one I have the greatest problem with is the sharp reduction in COE supply.

That was the killer move with the greatest impact on prices.

Reducing the car COE supply from an annual average of 105,000 from 2004 to 2008 to just over 20,000 today was much too precipitous.

In fact it should be policy not to vary the numbers by more than a certain amount - say 10 per cent at most - from year to year to allow prices to adjust gradually.

The roads may be more congested as a result of such a gradual approach, and more usage measures such as electronic road pricing and parking restrictions may be needed to relieve local bottlenecks.

But it wouldn't have shaken confidence in the COE system which I fear is the case now, because people believe it works only for top earners.

Alas, having taken the decision in 2009 to slam the brakes on COE supply, it is very difficult now for the Government to reverse its policy.

It did the next best thing, which was to reimpose the lending curbs.

Whether that will bring down COE prices remains to be seen. Over the longer term, however, and as long as the COE supply remains tight, I'm not hopeful as there's enormous spending power at the top and the rich will not give up their cars.

For those not in that class, I believe the Government made the right decision through the lending curbs to discourage young Singaporeans from committing so much of their earnings to buying a new set of wheels.

This newspaper reported last weekend that owning a car at today's prices can cost the owner $1.6 million over his or her lifetime.

That's an awful lot of money, enough to finance the children's education or provide a tidy sum for retirement.

Time to get used to taking the MRT or bus to work as so many others do in major cities around the world.

In Tokyo, London, New York and even Hong Kong, very few people drive to work unless they are CEOs with chauffeur-driven cars.

Singaporeans cannot expect to be so different.

hanfk@sph.com.sg
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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#2
govt policy makers need a helping hand from the people badly, as can be seen from the 'wayang' national conversation..to obtain feedback and consensus..bad..aren't policies making suppose to be their expertise and job responsibility..i think member of public should share the salary cake of these policy makers..these days..to be a policy maker is quite easy - dunno what to do..get free advice and free ideas from people..and yet still can enjoy gd perks and salary from the govt sector.
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#3
(10-03-2013, 09:10 AM)pianist Wrote: govt policy makers need a helping hand from the people badly, as can be seen from the 'wayang' national conversation..to obtain feedback and consensus..bad..aren't policies making suppose to be their expertise and job responsibility..i think member of public should share the salary cake of these policy makers..these days..to be a policy maker is quite easy - dunno what to do..get free advice and free ideas from people..and yet still can enjoy gd perks and salary from the govt sector.

No involvement of public get scolded for working within ivory tower. Involvement of public get scolded for not doing their job with helping hand from public

Policy maker job getting tougher and trickier... Big Grin
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
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#4
What's the article trying to say? If you read in between the lines, he is saying only certain classes of people are entitled to COEs because they have more money than working class. Isn't it?
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
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#5
This article does not make much sense.

2 policies changed in 2002 and 2003, but why does the increase only happen almost 10 years later?

the fundamental reason is that Singaporean are simply too rich for COE to be low(of course population increase also contributes much). so the price increase is just delayed, but it can't be avoided.
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#6
(10-03-2013, 12:20 PM)Temperament Wrote: What's the article trying to say? If you read in between the lines, he is saying only certain classes of people are entitled to COEs because they have more money than working class. Isn't it?

The first part of the article is about poor policy making with regards with the COE scheme. With so many brilliant scholars, the best answer they can give us on the wild fluctuation in COE values is "market forces"? Not funny considering that LTA controls the supply side as well as the rules of the game.

The last three sentences does not make sense to me. Unlike Singapore, in those three cities, cars are affordable in terms of purchasing but cost to drive to work is unaffordable.


Quote:Time to get used to taking the MRT or bus to work as so many others do in major cities around the world.

In Tokyo, London, New York and even Hong Kong, very few people drive to work unless they are CEOs with chauffeur-driven cars.

Singaporeans cannot expect to be so different.
You can count on the greed of man for the next recession to happen.
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#7
"And it's no good saying it's the free market working because the COE market isn't free. It's created by government and determined completely by policy."

Half true and half false. The govt does determine the supply but the prices are determined people who are willing to mortagate their future for a set of wheels and people who have too much money. It has been often mentioned in the forum that cars tend not to be a worthwhile investment.
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#8
(10-03-2013, 11:28 AM)CityFarmer Wrote:
(10-03-2013, 09:10 AM)pianist Wrote: govt policy makers need a helping hand from the people badly, as can be seen from the 'wayang' national conversation..to obtain feedback and consensus..bad..aren't policies making suppose to be their expertise and job responsibility..i think member of public should share the salary cake of these policy makers..these days..to be a policy maker is quite easy - dunno what to do..get free advice and free ideas from people..and yet still can enjoy gd perks and salary from the govt sector.

No involvement of public get scolded for working within ivory tower. Involvement of public get scolded for not doing their job with helping hand from public

Policy maker job getting tougher and trickier... Big Grin

Can't help but agree with you Smile
Fact is there is no policy that will make everyone happy. In this case, pole were complaining of sky high COE. Now complain cars not affordable to those who "need" it.
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