Easy loans, growing wealth fuel car demand

[Musicwhiz]

More personal debt. Wow.

The Straits Times
Apr 21, 2012
NEWS analYSIS
Easy loans, growing wealth fuel car demand

AN ENTRY-LEVEL car like the Toyota Vios is around $112,000 today, while a compact family mover like the Toyota Wish is close to $170,000.

Just five years ago, the Vios was as low as $50,000 and the Wish, below $70,000.

Why are people still buying cars when prices have risen to such unearthly levels?

Although there may well be a long list of factors influencing the startling consumer behaviour, the main ones are easy loans, rock bottom interest rates and growing wealth.

Since the Government deregulated car loans in 2003, banks have been falling over themselves to offer loans amounting to 100 per cent of the car price, with a repayment period of 10 years.

Also, with the smaller car market today, lenders are fighting tooth and nail to disburse loans. Cash rebates are among extra sweeteners being bandied about.

One credit dealer even posted on a popular car trading site that it will lend to borrowers with a bad credit history.

On top of that, interest rates for such loans are at a low 1.88 per cent. Unlike housing loans, car loan rates are locked in, so there is no risk of having to fork out more on monthly instalments down the road.

This relatively cheap and easy financing is also partly fuelling a 'trade up' to premium models, says Mr Ron Lim, general manager at Nissan agent Tan Chong Motor.

'At $100,000, assuming 100 per cent 10-year loan with 1.88 per cent interest rate, monthly instalment is $990,' Mr Lim notes. 'At $170,000, the monthly instalment will work out to $1,683.

'Upfront, to jump from $100,000 to $170,000 seems daunting. But when it's broken down into monthly instalments, the absolute monthly increase is only $693.'

Motor traders say current buyers of premium cars are polarised: those who pay cash and those who borrow to the hilt. Those in-between are getting fewer and fewer.

'So don't be surprised to see more and more employees driving the same class of cars as the boss,' quips Mr Lim.

Then, of course, there is the wealth factor. According to Boston Consulting Group's Global Wealth 2010 Report, Singapore has the highest proportion of millionaire households in the world (11.4 per cent), with the number of millionaires growing by one-third in 2010 alone.

Mr Zafar Momin, who teaches strategy implementation at the Nanyang Business School and who was a former automotive expert with Boston Consulting Group, observes: 'I believe the affluent buyers in the market are less sensitive to price; and there might also be corporate buyers who are obtaining vehicles for their executives regardless of price, via leasing schemes.'

On a more macro level, the growing Singapore population and an expanding cohort of car owners in recent years add to the underlying demand for cars.

In 1994, when certificate of entitlement (COE) prices were last as high as they are now ($64,000 for small car COEs; $92,000 for bigger car COEs), Singapore had 3.42 million people. The population has since grown by 52 per cent to 5.2 million.

And there are about 600,000 cars on the road today - almost double 1994's figure.

The fundamentals for strong demand notwithstanding, industry watchers say the current buying trend is unhealthy. It will drive COE prices to $100,000 and beyond, say motor traders.

But prices will head back to earth - possibly as fast as they have risen - from around 2014. That is when COE supply is expected to start expanding.

Wealthy buyers, says Mr Momin, 'do not feel the need to defer their purchases'. But other consumers buying at current prices 'will obviously regret when prices ease in coming years'.

COE supply will shrink further before expanding, though.

Tan Chong's Mr Lim expects COE supply for cars up to 1,600c - the mainstay of most car buyers - to fall by 55 per cent in the second half of this year.

The second half will also see the current 1.5 per cent allowable vehicle population growth rate slashed to 0.5 per cent.

That prospect has perhaps triggered some panic buying now. And with that, a self-fulfilling prophecy of COEs heading farther north in the making.

Dr Lee Der Horng, transport researcher at the National University of Singapore, reckons more COEs can be released in the near term.

He notes that a number of new road projects have been announced, while traffic flow enhancements - such as widening of expressways and junction improvement works like the Woodsville interchange - have been carried out.

Also, traffic information is being bolstered to help motorists avoid congestion.

'These may offer some justification to increase or maintain the current 1.5 per cent annual allowable vehicle population growth rate,' he says.

CHRISTOPHER TAN

[kazukirai]

Since the Government deregulated car loans in 2003, banks have been falling over themselves to offer loans amounting to 100 per cent of the car price, with a repayment period of 10 years.

Also, with the smaller car market today, lenders are fighting tooth and nail to disburse loans. Cash rebates are among extra sweeteners being bandied about.

One credit dealer even posted on a popular car trading site that it will lend to borrowers with a bad credit history.

Don't these kind of desperate loans kind of signal that all the low-hanging fruit have been picked? Kind of reminds me of stories from the US housing bust.

On top of that, interest rates for such loans are at a low 1.88 per cent. Unlike housing loans, car loan rates are locked in, so there is no risk of having to fork out more on monthly instalments down the road.

'Upfront, to jump from $100,000 to $170,000 seems daunting. But when it's broken down into monthly instalments, the absolute monthly increase is only $693.'

And this is why the rich get richer and the poor get poorer.

[Temperament]

Since the Government deregulated car loans in 2003, banks have been falling over themselves to offer loans amounting to 100 per cent of the car price, with a repayment period of 10 years.

Also, with the smaller car market today, lenders are fighting tooth and nail to disburse loans. Cash rebates are among extra sweeteners being bandied about.

One credit dealer even posted on a popular car trading site that it will lend to borrowers with a bad credit history.

Don't these kind of desperate loans kind of signal that all the low-hanging fruit have been picked? Kind of reminds me of stories from the US housing bust.

On top of that, interest rates for such loans are at a low 1.88 per cent. Unlike housing loans, car loan rates are locked in, so there is no risk of having to fork out more on monthly instalments down the road.

'Upfront, to jump from $100,000 to $170,000 seems daunting. But when it's broken down into monthly instalments, the absolute monthly increase is only $693.'

And this is why the rich get richer and the poor get poorer.

In this case, its your choice to remain poor as you choose to borrow to buy a car. We know some people who can really, really afford a car prefer other forms of transport. How about a rental car with a free chauffeur thrown in?
When i bought my Vios it was only 50k + . Only left about 3 years +.
So i choose to remain poor but not as poor as if you choose to borrow and buy now.

[Musicwhiz]

Hi Kazukirai,

Haha yes well-said indeed. The poor do get poorer because of their (mis)management of money and the taking up of "bad" loans to purchase depreciating assets. In this case, we are talking about a 6-digit commitment which is spread over 10 years with an effective financing cost of about 3.5%, and this is a really heavy cash-flow burden and liability for many families. Yet, many would still consider this "affordable"; the concept being so twisted and unrecognizable that people take "affordable" to mean any installment which they can bear without borrowing even more money. Sad part is that this may leave you with precious little savings or no savings at all!

There are a few reasons why people should get cars:-

1) If the car can help you in your work and enhance your income (e.g. sales job, financial planner, property agent).

2) If the car is for shuttling disabled or frail family members,

3) The car is shared among a family with 3-4 kids, so that the effective cost for each person is much reduced.

Even then, I would strongly recommend a second-hand car, which can cost around $30,000 to $35,000 (3-4 year COE remaining). Most of them are quite road-worthy and it's OK to spend those few extra dollars on repairs/maintenance rather than 10s of thousands on a fresh piece of paper (and for the smell of those plush yet exorbitant leather seats).

I feel the authorities should also clamp down on the financing aspect in order to stifle demand - the COE system just makes everything more expensive BUT it also makes people heavily indebted, so from a personal finance perspective I guess more and more people will become "compulsory" indentured servants to their jobs. My suggestions:-

1) Restrict the loan amount to just 50% of the total purchase price, instead of current 100%.

2) COE should be payable fully in CASH, much like our dear COV now for properties.

3) Reduce the maximum loan period to 5 years instead of the current 10 years.

Hopefully, we can see some sanity in a few years time otherwise this will all blow up spectacularly (when combined with the current property bubble).

[d.o.g.]

1) Restrict the loan amount to just 50% of the total purchase price, instead of current 100%.

The banks and finance companies will complain that the government is interfering in their business, they will lose money, jobs will be lost etc. Just like the hullabaloo now over the (mis)-selling of life insurance.

2) COE should be payable fully in CASH, much like our dear COV now for properties.

This will cause COEs to crash. LTA gets the COE money and sends it on to the Consolidated Fund. Not very likely the government will agree to kill this cash cow. A great excuse - if they can't get money from COEs, GST will have to go up. Etc.

Another good reason not to control COE prices - it doesn't change the number of cars on the road. The supply of COEs is determined by a formula. COE prices do not affect how many COEs are issued. It is the scrap rate and the allowable growth in car population that determines the supply of new COEs.

3) Reduce the maximum loan period to 5 years instead of the current 10 years.

See bank whining above.

As usual, YMMV.

[camelking]

Just create a separate COE for taxi.

The taxi is a revenue generating vehicle and hence shouldn't be classified together with normal cars.
Government gives money to the transportation giant because THEY GOT NO FUND TO BUY NEW BUSES.
BUT the same company has the fund to bid for COEs???
Does it make sense?
I say, create a separate group for taxi COE and for every COE secured by the transportation giant, reduce the amount from the funding to the bus division.
Will they do it? They won't.

[shanrui_91]

I think too much blame has been pushed to the taxis... From 2010 to mar 2012, a total of 11500 cars are added as commpared to 1200 for taxis. the funding for buses is really neccessary if you are not talking about cross-funding from other segments. Adding 800 buses is not going to add 800 busloads of revenue for the company, instead it is going to mean higher fixed cost per dollar earned as well as 800 more bus drivers. The only way to go for public transport is really to nationalize it and use rental + advertising to subsidize public transport for the public

And if you increase the COE for taxi, comfort and co will just raise the daily rental rate for taxi drivers. The reason for the rise in COE is as simple as our Transport Minister deciding to cut the growth rate of car population to 0.5% from 1.5% currently.

[Musicwhiz]

The banks and finance companies will complain that the government is interfering in their business, they will lose money, jobs will be lost etc. Just like the hullabaloo now over the (mis)-selling of life insurance.

It is interesting, though, that in the first place it was in 2003 that the car loan business was "liberalized" to allow 100% financing and with the loan tenure extended from 7 years to 10 years. Obviously it was boom-time then for banks and finance companies, and even until now people are borrowing up to their eyeballs just to own their favourite rides.

So would it not be fait for the Government to say - hey look, you guys had a ball of a time from 2003-2012 (9 years), so now it's time to hunker down and ensure those people you are lending to can actually pay back their debts. I think it's bad for everyone (society, banks and Govt) if more and more people face financial ruin because of reckless borrowing and an inability to manage their cash flows.....

[brattzz]

guess all drivers go in with their eyes open... for gov, just collect $ happy!

[Temperament]

i am also "happy" if i sell my car now a 2005 Vios. But can i? What the @#$%X is the PAPY doing to the mass population?