A Gear Shift For The Car Population

This post first appeared on the Breakfast Network.

It was Budget Day and many carrots were handed out.

But most folks I know zoomed in on the two new rules for purchasing new cars:

1. The new MAS rulings for car loans, capped at 60 per cent for OMV less than $20K, and 50 per cent for OMV more than $20K. Car loans are now capped at a tenure of five years.

2. The new tiered Additional Registration Fee (ARF) which increases the tax on luxury cars by up to 180 per cent, versus 100 per cent for low capacity car models.  According to Today: “The ARF for cars with OMVs up to S$20,000 will remain at the current 100 per cent, but two more tiers will be introduced for more expensive models. The next S$30,000 of the OMV of the car will attract an ARF rate of 140 per cent, and any value beyond S$50,000 will attract an ARF rate of 180 per cent.”

The knee jerk reactions came Fast and Furious :

- Car dealers opening their showrooms till midnight for one last desperate lunge at buyers. The question is how many impulse buys were there last night? Once again, it looks like more car salesmen are about to lose their jobs as more buyers are squeezed out of the market.

- On any Facebook stream, you can see two clear reactions: “It’s about time!” vs “Another policy to favor the rich!”. It’s also obvious who is cash-rich and who isn’t, based on the comments.

- Speculation among the more car-savvy folks on how much the COE will drop due to this. Personally, I’m guessing 20-50 per cent drop over six months as the market of buyers shrink. The question is: Of the people who are interested in spending over $200K on a new car, how many of them are cash rich?

Don’t be hating me okay… but I think the Gahmen’s latest measures on tiered ARF tax and cap on car loans are logical and sensible ways of controlling the car population.

Some may think that this favors the rich, but not really, since the rich are taxed more on luxury cars now. Sure, it’s not going to stop a millionaire from buying his Porsche, but it does make the average Joe looking to buy a BMW think a bit harder about his purchase.

The latest policies favor the financially prudent who know how to accumulate cash for a rainy day. For too long, people have forgotten the virtue of saving cold hard cash, relying instead on loans and credit, and spending more than their means. Even if the COE price doesn’t drop much, at least this is sound public policy that will appease those who have been unhappy about the current COE system and have been asking for alternatives (which have been soundly rejected by the Transport Ministry repeatedly).

It also sends a very explicit message to young people just starting out in their careers that owning a car is not a given, but a luxury item. The 2000s were a period when COE prices were low (I got mine at under $5,000 in 2009) due to wrong projections of COE deregistrations, and many young people could afford cars then. Since then, there have been one corrective action after another by the authorities to reverse the over-supply of COE in the market, and this looks like the most potent move yet.

More interestingly, the latest move on capping car loans comes from the Monetary Authority of Singapore because it wants to “safeguard against borrowers defaulting on their repayments” and encouraging financial prudence.

Now how many people have defaulted on their car loans recently? That would be a newsworthy number to know. If the number is low, maybe the G folks should just say it straight: “We don’t want you to borrow money for a car you can’t afford.”