Last month, the Monetary Authority of Singapore (MAS) introduced new measures designed to curb over-leveraged car purchases in Singapore. In some ways, it was a timely slap-in-the-face to prospective car buyers whose unabating demand had resulted in COE prices coming precariously close to the psychological $100,000 mark in January 2013 (link). In general, it feels that the demand-cooling measures are in the right direction, but I am hesitant to overlook some potential externalities that may arise for these newly-introduced car ownership policies.
What are the changes?
For those who are not familiar with the February 2013 changes, I explain them concisely here. Two measures were announced, the first being a revision of the Additional Registration Fee (ARF). Essentially a tax on the baseline Open Market Value (OMV) of a vehicle, the ARF was revised from a flat 100% to a progressive structure depending on the OMV of the vehicle. For cars with up to $20,000 OMV, the tax remains unchanged, but more expensive cars will now come with a higher price tag. The $20,000 to $50,000 OMV bracket will be taxed at 140% while any part of the OMV greater than $50,000 will be taxed at 180%. For an outline of the new fees, see here.
The second change is arguably the more ominous one for would-be car buyers. Previously, banks were able to offer car loans at close to 90% of the purchase price, with loan terms of up to ten years. Now, the new regulations cap car loans at 60% of the purchase price (50% for more expensive vehicles) and with a maximum term of five years. For a $100,000 car, this means that the buyer has to fork out a $40,000 cash downpayment, and for the next 60 months, service his car loan to the tune of $1,000 per month plus interest.
Impact of the changes
The effect of the changes were felt almost instantly in the car industry, with dealers lamenting that their sales would be adversely affected due to the drastic nature of the new rulings. Some dealers stayed open till midnight on the night before the new rulings kicked in just to secure last-minute purchases. In any regulated industry, changes are inevitably bound to impact its stakeholders, and buyers and sellers work within the regulatory framework imposed by the government, dealing with changes as they come. Nonetheless, I think few dealers were expecting such drastic measures to be announced.
This is not to criticize the new measures per se. I was surprised to find out that 90% loans were pretty much the norm with car financing packages. Considering the quick depreciation of car values, the 90% loan-to-value (LTV) could quickly become 95%, 100% or even more than 100%. Such high LTVs are indicative of perverse market forces at work. One needs to question how banks were willing to extend such high leverage to prospective car buyers at very low interest rates (car loan interest rates are around 2% presently). At the same time, it can also be inferred that buyers were taking advantage of the situation to finance the bulk of their car purchase through debt.
Under the old circumstances, a buyer of a $100,000 car could make a downpayment of $10,000 and then monthly payments of $750 plus interest over ten years. Today, the downpayment needs to be at least $40,000 and the monthly debt service is $1000 plus interest over five years. I feel that this is a much-needed realignment to rein in the financial free-wheeling that the previous rules permitted. The message to car buyers is clear: there is no hiding the fact that owning a car in Singapore is expensive, and car buyers need to come to terms with the reality as to what they can realistically afford. If you earn $3,000 a month, you would be insane to saddle a full third of your income servicing your car loan (if you could first cough up $40,000, that is). Even if you earn $5,000 a month, 20% of your paycheck goes towards a fast-depreciating asset that, inevitably, incurs associated petrol, parking, maintenance and insurance fees. In fact, it was estimated that if one owns a car between the age of 25 to 75, the all-inclusive outlay might well come up to the tune of a cool $1.6 million (source).
Besides financial prudence, Dy Prime Minister Tharman cited driving COE prices down as another reason for this new measure.While I feel that financial realism needs to be administered in a large dose and am supportive of the former, I feel somewhat skeptical about the latter, especially in light of his comments that the measures were not designed to be permanent. COE prices are a reflection of demand and supply of car ownership: a fixed quantity is released regularly, and dealers and individuals are allowed to place a bid for one at whatever price they are willing to pay. The new loan regulations can be expected to bring down COE prices, but should reducing COE prices itself be a motive behind the new regulations? This second reason strikes me as absurd, and the non-permanency of the measures even more so. Are we expecting at some date X in the future, we will return to 90% car loans with ten year terms? No crystal ball is needed to forecast what is will happen to COE prices overnight when that happens. So why do we want to artificially bring the prices down now, only for a correction to take place at some unknown date in the future?
The other measure introducing tiered ARFs is simpler to analyse. The high prices of cars caused in part by the increasing COEs made purchasing more expensive European models fairly lucrative compared to their Japanese counterparts, since the price disparity was a small fraction of the total price. Buyers were gravitating towards entry-level Volkswagens and BMWs, paying the couple of thousand dollars more over a Toyota, Nissan or Mazda. The introduction of the tiered ARF could be seen as an attempt to correctly price a 'luxury good' in comparison to a 'basic good'. However, my skeptical thinking cap wonders if this was but just a move designed to shield the prestige and exclusivity of European marques in Singapore, in order to maintain an aspirational end-point for the majority of Singaporeans whose desire for a high-end car forms an integral part of their psyche. In any case, the additional ARF is marginal; a prospective buyer of a Toyota Camry needs to pay $1,400 more, while an Audi A6 owner is going to have to write a cheque for $27,000 extra. One could argue that this tiered structure encourages financial prudence as well--if you cannot afford that additional 27 grand, you probably should be thinking of buying a Camry.
Possible Externalities
Across the board, the new measures will make car ownership more difficult financially. Wealthy households will feel some measure of fiscal pinch on their pockets, but in all likelihoods will still be able to afford their rides (you know, a Mercedes E-class instead of an S-class). It is the prospective buyer at the margin who is more adversely affected--families who, under the old rulings could make a highly-leverage car purchase, but now have been given a stab of realism that "you're not rich enough to be buying a car."
The question is, what will people do if they now cannot afford a car, and the obvious, time-weathered answer is to take public transport. Public transport in Singapore is fairly developed, and most of the time, well-run. Capacity strains have been felt in the recent few years, but new capacity is slated to come online which will hopefully alleviate some of the congestion. Travelling on public transport as an individual is usually safe, predictable and inexpensive. But I think it is much more difficult for a family with two or more young children to commute via public transport. Imagine negotiating a baby stroller through the MRT system. Not a fun prospect. Now imagine twice of that, or with a small kid in tow. New families with young children tended to buy cars if they could afford them, simply for the ease of getting around with their toddlers. Now, the young couple with one kid is going to think twice about hampering their mobility even further by conceiving a second child.
The inability to afford a car becomes yet another obstacle towards having more children, assuming that most young adults do not relish the harrowing prospect of trying to manage their brood through the labyrinthine intricacies of the Singapore public transportation network. If this ends up discouraging young parents from having more children, other measures designed to encourage babies are not going to make much headway at bringing Singapore's birth rate above the dismal 1.2.
Final thoughts
I think the steps taken were in the right direction in the sense of fostering (by compulsion, you could say) greater financial prudence among would-be car buyers. The measures were seen to be drastic, partly because the reality is harsh: even if you earn $5k a month, you are ill-equipped to own a car in Singapore. This is only to be expected in a land-scarce country that is increasingly becoming an immigration destination for high net worth individuals from abroad. The thing is, the wealthy like their cars just as much as the average Singaporean likes his car, and the wealthy are willing and able to pay the high price associated with car ownership. The limited supply of car ownership (as enforced by the COE) means that those with the highest propensity to pay get their goods first, before the supply percolates down to the other rungs of society. As our country attracts more high net worth individuals who buy flashy, expensive cars (often more than one while they're at it) the opportunities of car ownership become less accessible to the rest of society.
This is the reality, and it will be the way things are going forward. The new measures are almost like a reality check, and a much-needed one, for those who us who read the WSJ report (link) about the uber-rich Pangaea nightclub in Singapore and think that $26,000 cocktails are ludicrous. I do not see how the recently introduced regulations can only be temporal; I feel they are here to stay. And while they are in place, the average Singaporean family is (once again) going to reconsider having that additional child.
What are the changes?
For those who are not familiar with the February 2013 changes, I explain them concisely here. Two measures were announced, the first being a revision of the Additional Registration Fee (ARF). Essentially a tax on the baseline Open Market Value (OMV) of a vehicle, the ARF was revised from a flat 100% to a progressive structure depending on the OMV of the vehicle. For cars with up to $20,000 OMV, the tax remains unchanged, but more expensive cars will now come with a higher price tag. The $20,000 to $50,000 OMV bracket will be taxed at 140% while any part of the OMV greater than $50,000 will be taxed at 180%. For an outline of the new fees, see here.
The second change is arguably the more ominous one for would-be car buyers. Previously, banks were able to offer car loans at close to 90% of the purchase price, with loan terms of up to ten years. Now, the new regulations cap car loans at 60% of the purchase price (50% for more expensive vehicles) and with a maximum term of five years. For a $100,000 car, this means that the buyer has to fork out a $40,000 cash downpayment, and for the next 60 months, service his car loan to the tune of $1,000 per month plus interest.
Impact of the changes
The effect of the changes were felt almost instantly in the car industry, with dealers lamenting that their sales would be adversely affected due to the drastic nature of the new rulings. Some dealers stayed open till midnight on the night before the new rulings kicked in just to secure last-minute purchases. In any regulated industry, changes are inevitably bound to impact its stakeholders, and buyers and sellers work within the regulatory framework imposed by the government, dealing with changes as they come. Nonetheless, I think few dealers were expecting such drastic measures to be announced.
This is not to criticize the new measures per se. I was surprised to find out that 90% loans were pretty much the norm with car financing packages. Considering the quick depreciation of car values, the 90% loan-to-value (LTV) could quickly become 95%, 100% or even more than 100%. Such high LTVs are indicative of perverse market forces at work. One needs to question how banks were willing to extend such high leverage to prospective car buyers at very low interest rates (car loan interest rates are around 2% presently). At the same time, it can also be inferred that buyers were taking advantage of the situation to finance the bulk of their car purchase through debt.
Under the old circumstances, a buyer of a $100,000 car could make a downpayment of $10,000 and then monthly payments of $750 plus interest over ten years. Today, the downpayment needs to be at least $40,000 and the monthly debt service is $1000 plus interest over five years. I feel that this is a much-needed realignment to rein in the financial free-wheeling that the previous rules permitted. The message to car buyers is clear: there is no hiding the fact that owning a car in Singapore is expensive, and car buyers need to come to terms with the reality as to what they can realistically afford. If you earn $3,000 a month, you would be insane to saddle a full third of your income servicing your car loan (if you could first cough up $40,000, that is). Even if you earn $5,000 a month, 20% of your paycheck goes towards a fast-depreciating asset that, inevitably, incurs associated petrol, parking, maintenance and insurance fees. In fact, it was estimated that if one owns a car between the age of 25 to 75, the all-inclusive outlay might well come up to the tune of a cool $1.6 million (source).
Besides financial prudence, Dy Prime Minister Tharman cited driving COE prices down as another reason for this new measure.While I feel that financial realism needs to be administered in a large dose and am supportive of the former, I feel somewhat skeptical about the latter, especially in light of his comments that the measures were not designed to be permanent. COE prices are a reflection of demand and supply of car ownership: a fixed quantity is released regularly, and dealers and individuals are allowed to place a bid for one at whatever price they are willing to pay. The new loan regulations can be expected to bring down COE prices, but should reducing COE prices itself be a motive behind the new regulations? This second reason strikes me as absurd, and the non-permanency of the measures even more so. Are we expecting at some date X in the future, we will return to 90% car loans with ten year terms? No crystal ball is needed to forecast what is will happen to COE prices overnight when that happens. So why do we want to artificially bring the prices down now, only for a correction to take place at some unknown date in the future?
The other measure introducing tiered ARFs is simpler to analyse. The high prices of cars caused in part by the increasing COEs made purchasing more expensive European models fairly lucrative compared to their Japanese counterparts, since the price disparity was a small fraction of the total price. Buyers were gravitating towards entry-level Volkswagens and BMWs, paying the couple of thousand dollars more over a Toyota, Nissan or Mazda. The introduction of the tiered ARF could be seen as an attempt to correctly price a 'luxury good' in comparison to a 'basic good'. However, my skeptical thinking cap wonders if this was but just a move designed to shield the prestige and exclusivity of European marques in Singapore, in order to maintain an aspirational end-point for the majority of Singaporeans whose desire for a high-end car forms an integral part of their psyche. In any case, the additional ARF is marginal; a prospective buyer of a Toyota Camry needs to pay $1,400 more, while an Audi A6 owner is going to have to write a cheque for $27,000 extra. One could argue that this tiered structure encourages financial prudence as well--if you cannot afford that additional 27 grand, you probably should be thinking of buying a Camry.
Possible Externalities
Across the board, the new measures will make car ownership more difficult financially. Wealthy households will feel some measure of fiscal pinch on their pockets, but in all likelihoods will still be able to afford their rides (you know, a Mercedes E-class instead of an S-class). It is the prospective buyer at the margin who is more adversely affected--families who, under the old rulings could make a highly-leverage car purchase, but now have been given a stab of realism that "you're not rich enough to be buying a car."
The question is, what will people do if they now cannot afford a car, and the obvious, time-weathered answer is to take public transport. Public transport in Singapore is fairly developed, and most of the time, well-run. Capacity strains have been felt in the recent few years, but new capacity is slated to come online which will hopefully alleviate some of the congestion. Travelling on public transport as an individual is usually safe, predictable and inexpensive. But I think it is much more difficult for a family with two or more young children to commute via public transport. Imagine negotiating a baby stroller through the MRT system. Not a fun prospect. Now imagine twice of that, or with a small kid in tow. New families with young children tended to buy cars if they could afford them, simply for the ease of getting around with their toddlers. Now, the young couple with one kid is going to think twice about hampering their mobility even further by conceiving a second child.
The inability to afford a car becomes yet another obstacle towards having more children, assuming that most young adults do not relish the harrowing prospect of trying to manage their brood through the labyrinthine intricacies of the Singapore public transportation network. If this ends up discouraging young parents from having more children, other measures designed to encourage babies are not going to make much headway at bringing Singapore's birth rate above the dismal 1.2.
Final thoughts
I think the steps taken were in the right direction in the sense of fostering (by compulsion, you could say) greater financial prudence among would-be car buyers. The measures were seen to be drastic, partly because the reality is harsh: even if you earn $5k a month, you are ill-equipped to own a car in Singapore. This is only to be expected in a land-scarce country that is increasingly becoming an immigration destination for high net worth individuals from abroad. The thing is, the wealthy like their cars just as much as the average Singaporean likes his car, and the wealthy are willing and able to pay the high price associated with car ownership. The limited supply of car ownership (as enforced by the COE) means that those with the highest propensity to pay get their goods first, before the supply percolates down to the other rungs of society. As our country attracts more high net worth individuals who buy flashy, expensive cars (often more than one while they're at it) the opportunities of car ownership become less accessible to the rest of society.
This is the reality, and it will be the way things are going forward. The new measures are almost like a reality check, and a much-needed one, for those who us who read the WSJ report (link) about the uber-rich Pangaea nightclub in Singapore and think that $26,000 cocktails are ludicrous. I do not see how the recently introduced regulations can only be temporal; I feel they are here to stay. And while they are in place, the average Singaporean family is (once again) going to reconsider having that additional child.
