Easing of car loan rules comes with potential downside

OTHER than those hoping for lower Certificate of Entitlement (COE) premiums, it appears that almost everyone else is happy about the revised vehicle financing restrictions.

The Monetary Authority of Singapore's (MAS) move to relax the loan curbs instituted in February 2013 was good news for many groups of people and at least one country.

From the car buyer who couldn't scrape together enough for a cash downpayment on a budget model, to the wealthy super sports car buyer who prefers to stretch his repayment schedule, the barriers to entry were lowered on Friday when the loan quantum permitted rose to either 60 per cent or 70 per cent depending on the car price, and the maximum loan tenure raised from five years to seven.

Also from the motor industry, which sees stronger demand and therefore fatter margins by raising prices, to the government whose wallet will be fattened by higher COE revenues.

And most of all, the flagging Singapore economy which will benefit from the stimulus.

In easing the more than three-year-long restrictions, the MAS said that the adjustments were possible with the sustained moderation in COE premiums and resulting inflation. But it also means that COE premiums will probably go back up.

Car dealers are glad for the changes not only because demand for new cars will strengthen but because most genuinely believe the new regulations are more equitable. Like Goldilocks, they thought 50 per cent and five years was too harsh, 100 per cent and 10 years too lax, but 70 per cent over seven years is just right.

At the same time, they are also expecting COE premiums to rebound - not much initially, maybe a few thousand dollars in the first couple of rounds because they had collected orders with relatively low COE thresholds. But very probably a bit more after that.

Any increases could, however, be mitigated by the expanding COE quota. Some expectations put passenger car COE numbers jumping by up to 50 per cent more than last year to over 80,000 units (57,589 cars were registered in 2015).

The ongoing economic uncertainty could cap any premium increases as well. But even if they do, assume the premiums of the COEs which can be used to register a passenger car - Categories A, B and E - rise by an average of S$10,000 over the next 12 months.

If 80,000 such COEs were to be made available, then it could boost the government's coffers by as much as S$800 million in a very decent revenue-generating effort.

In the recently announced Budget though, the government only forecasts COE premiums from April 2016 to March 2017 climbing to S$5.655 billion from S$5.406 billion the previous year, or a more modest increase of S$249 million. Which is a relief because it could mean it is looking at a smaller appreciation in COE premiums.

But then, there is the question of placing a new car within the means of a bigger group of people than before, at a higher price, with bigger interest payments, in the context of a weaker economy.

Will that cause some marginal owners to overstretch and put at risk the MAS's efforts to promote financial prudence?

Of course, it must be noted that the default rate here is already very low. But could that change if economic conditions don't improve soon?

But perhaps more curious is that in addition to serving the longer term purpose of encouraging financial prudence, the MAS states that the loan measures also support efforts to promote a car-lite society.

Given that the COE supply is controlled, how does society become car-lite when the only variable involved here is demand?

Could this be a clue that society will soon be COE-lite too because the quota will be dramatically slashed in the near future? Should we worry that our Singapore love affair with the car will end soon?

Or maybe, instead of trying to read between the lines, we should all just be happy about the new rules and go out and buy a car.

samuelee@sph.com.sg

This article was first published on May 30, 2016.
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