Cut Singapore COE supply? Only for the right reasons

Cut Singapore COE supply? Only for the right reasons

Quota-cut pleas from motor traders do not deserve much sympathy

By Christopher Tan, Senior Correspondent

CUT COE supply to prop up car prices? At first glance, it sounds like a preposterous suggestion. People generally want low car prices, not high.
But what about existing car owners, who suffer lower resale values when COE prices - and consequently, new car prices - fall?

That is the thrust of an argument by the Singapore Vehicle Traders Association and the Automotive Importers and Exporters Association in their petition to the Government.

They are asking for car COE quotas to be trimmed by 25 per cent for the next six months, to prevent the car industry from ‘collapse’.

Why not? After all, state land parcels released for sale are timed judiciously; and public projects are held back to prevent price spirals. So why can’t economic concerns influence COE supply, too?

Here is why.

The explicit role of the certificate of entitlement system is to manage a sustainable vehicle growth rate. It is to prevent Singapore from turning into a gigantic carpark. Nothing else.

Its supply is determined by a prescribed formula: number of certificates matching number of vehicles taken off the road + an allowable annual growth rate of 3 per cent (which is set to be cut to 1.5 per cent from next year).

To tamper with the supply for reasons other than the above would be counterproductive. It would be a precedent that is hard to undo, and one that will rob the quota system of some integrity.

The 18-year-old system has witnessed its share of economic booms and busts.

In the 1990s, when car COE premiums averaged $40,000 and hit as high as $110,000, there was not much ado from the trade about raising COE supply. Sure, there were private mutterings, but no formal representations.

The new industry might have been selling fewer cars, but profit margins were enormous - $25,000 for a mid-size Honda or Toyota, $50,000 for a big Volvo and over $90,000 for a Mercedes limo.

And many traders built their fortunes on used cars.

But someone paid the price: consumers. Years later, when COE premiums softened, many car owners were saddled with rides that were worth less than their scrap value. Which triggered waves of relatively new cars being sent to the scrapyard or re-exported.

But buyers were as much to blame as sellers. After all, they were the ones willing to fork out $130,000 for a Toyota Corolla and nearly $300,000 for a Mercedes E-class.

(Today, you can get the same cars for $55,000 and $137,000 respectively.)

The current phenomenon of low COE premiums (including Wednesday’s historic $2 premium) is not the sole doing of the economy.

Sellers, buyers, and last but not least, lenders are largely to blame.

As soon as the Monetary Authority of Singapore deregulated the vehicle loan market in January 2003, banks and finance companies lured car buyers with easy credit.

Hong Leong Singapore Finance was first off the block with a zero down payment 10-year loan package.

A few years later, newcomer GE Money muscled in by targeting parallel importers and used car dealers.

The 100 per cent, 10-year loans were not enough. Cash rebates were thrown in. Yes, you were paid cash to buy a car!

The schemes attracted many consumers who would not have been able to afford a car otherwise. The lenders were not worried, because they figured that COE supply would shrink in the coming years, and thus car resale values would rise. The sellers faced no risk and were not worried.

Guess what. The downturn hit - hard and fast.

The United States - the world’s largest vehicle market - now faces the same problem. After 9/11, car-makers handed out easy loans (often with zero interest) to lift consumer sentiment.

Well, we know how that story ended. General Motors, Ford and Chrysler are today asking Washington for a US$25 billion bailout.

The two motor trade associations in Singapore are asking for a bit less. They want COE supply to be crimped so that premiums can return to the $10,000-$15,000 region - from between $2 and $6,889 today.

It affects more than just us, they say. It affects car owners and lenders as well.

But no sympathy should be wasted on the latter. If they are facing a high loan delinquency rate or hold collateral that is worth less than what they are owed, they brought it on themselves.

Car owners should not fret, unless they are among those who took up those impossibly huge financing packages dangled by the lenders. If for some reason they cannot continue to service their loans, they could be in a bit of a bind.

Those who have been prudent and who are not in a hurry to sell their cars will ride out the current storm - as they did in the past.

As for the motor traders, they made a business decision, not unlike the property developer who bid aggressively for a plot of land or the wine stockist who bought a warehouse load of champagne.

They will have to wait out the slowdown like everyone else.

Having said all that, there is perhaps one valid reason why COE supply should be trimmed: There are more certificates available than the number of cars taken off the road.

For instance, 5,091 cars were scrapped last month. But there were 7,457 COEs available for bidding. Even if you factor in the allowable growth rate, there were 1,000 extra COEs in the system.

On that front, the numbers need to be tweaked.

Source : Straits Times - 21 Nov 2008

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