The Straits Times
www.straitstimes.com
Published on Feb 26, 2013
BUDGET - SINGAPORE SHIFTS GEARS
COE prices likely to tumble after double whammy
Of the two, new financing curbs will have greater impact than tiered ARF
By Christopher Tan, Senior Correspondent News Analysis
A MOVE to pile on additional tiers of taxes on luxury cars and a separate step to regulate car loans will have a double-whammy effect on certificate of entitlement (COE) prices.
Premiums, currently hovering at near-record levels of $78,000 for cars up to 1,600cc and $93,000 for cars above 1,600cc, are likely to tumble. At least initially.
Finance Minister Tharman Shanmugaratnam, in his Budget speech in Parliament, introduced a novel tiered system for the Additional Registration Fee (ARF, or the main car tax).
For the first $20,000 of a car's OMV (open market value, or approximate cost price), the current 100 per cent ARF remains.
For the next $30,000 in OMV, an incremental 140 per cent ARF applies.
And for the remaining OMV that is above $50,000, a 180 per cent ARF applies.
This tiered format, which will apply to cars registered with COEs secured from next month, is the first of its kind since ARF was introduced 45 years ago.
It seeks to make car taxes more progressive by making the rich pay more.
In recent years, there have been calls from the public for the Government to address a perceived inequity in the car market - something that has come into sharp focus with the narrowing gap between COE rates for small and big cars.
The tiered format should widen the gap somewhat. Take the prices of the Toyota Corolla and Mercedes-Benz C180, both 1.6-litre models.
Last month, their retail prices were around $125,000 and $188,000 respectively - a difference of $63,000. From next month, all things being equal, the gap will widen to $67,200.
This alone is unlikely to dampen COE prices much as those who can afford a Merc can pay the extra tax without much hardship. In fact, amortised over a 10-year loan period, the difference works out to less than $40 a month.
The impact of the new financing curbs is far greater.
The biggest hurdle to owning a C180 will be a $96,000 cash outlay, as the loan is limited to 50 per cent of its purchase price.
Those who already own a car should find it easier to fork out this initial amount as the trade-in or scrap value of an old car will cover at least part of the cash outlay.
But first-time buyers, as well as those who had borrowed to the hilt for their current cars, will find it much harder.
Sellers will no doubt try to overcome this hurdle by inflating the amount for the buyer's trade-in vehicle - as they did during the pre-2003 finance-regulated era.
But this time the downpayments needed are higher, so the amount needs to be inflated more. The resulting quantum may be too high to get around without attracting the attention of the authorities.
The heftier cash outlay aside, every car buyer will also have to come up with bigger monthly instalments because car buyers can take only a maximum five-year loan, instead of up to 10 years.
The financing curbs, together with the tiered ARF format, should send COE prices southwards.
Mass market buyers will reassess their finances - to go ahead and buy the car they want, downgrade, or hold off the purchase altogether.
Wealthier buyers may be able to dig deeper into their wallets for the heftier upfront payments, but are likely to hold back just the same because of sentiment. They might want to stay on the sidelines to have a better idea of where the market is headed before deciding what to do next.
This too will contribute to a softening of COE prices.
In the final analysis, the twin measures are unlikely to affect the majority of existing car owners significantly.
The tiered ARF's impact on the rich is not as drastic as it looks because they will get back bigger scrap rebates when it is time to deregister their vehicles.
Likewise, the loan restrictions are unlikely to affect those in the upper wealth classes who are more likely to be cash-rich and able to meet the heftier downpayments.
Those who will feel the impact of the measures most keenly will be the marginal buyers - especially first-timers looking to get on the "car ladder" - and the budget upgraders.
The latter will include Honda Civic owners who are eyeing that BMW 3-series or Mercedes C-class.
Nevertheless, if the measures are able to suppress COE prices over the longer term, all buyers will benefit.
That, however, remains a pretty big "if".
christan@sph.com.sg
