Tuesday, March 5, 2013

Car loan curbs: What were they meant to achieve?

Mar 02, 2013
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.

[This article misses the point of vehicle ownership curbs and policies. And the need for free-flowing roads. His last suggestion is particularly telling.]

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