Sunday, March 10, 2013

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

Mar 10, 2013
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.

[I am disappointed that while this article lists 3 ways to RAISE COE (which was done historically) there was no suggestion as to how to ease the COE prices.

The key issue with the COE scheme is that it allocates resources based on ability to pay, not on the basis of need. This is "intentional" in the sense that trying to allocate resources based on need is a minefield of subjective assessment and emotional blackmail.

A secondary issue (or corollary to the key issue) that he identifies is that the wealthy will not be discouraged by these measures as they have resources to spare. One solution is to try to separate the wealthy from the not-wealthy.

A COE ctegorisation by OMV is one way. Vehicles with OMV of less than say, $20,000 should be Category A. Higher than that would be Cat B. Or if you want more differentiation, have three Categories for low OMV, mid OMV, and high OMV. And provide more COEs for the lower OMV categories, and fewer COEs for the higher/highest OMV. Those who simply NEED a car will make do with a cheaper car, and compete with other cheap car buyers who will presumably (and rationally) bid low prices for their low OMV vehicles.

Wealthy car owners seeking to buy High OMV vehicles will compete with other high OMV vehicles buyers for the limited COE and can bid the prices to heaven for all the effect it will have on the Cat A car buyers.

Of course, one possible problem is that wealthy car buyers may shift their attention to the Cat A cars. They can afford to bid high in that category, but hopefully, the incongruence of paying $60k COE for a $20k car would strike even them as downright silly.

In any case, if the number of wealthy car-buyers shifting to Cat A is less than the number of COE for Cat A cars, the increase in COE premiums would be moderate. It is only if they are equal to or more than the COE quota available that the COE would rise uncontrollably.

But even if the wealthy buy Cat A cars in droves, there is another side effect: The reduction of "conspicuous consumption". If Wealthy are also buying Cat A cars, a wealthy and non-wealthy would park their Kia Picanto next to each other and there would be little envy. There would be less social friction between the Have-a-lots and the Have-a-littles.]

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