Budget 2013 Point 1 - Car Loan Policy & COE Prices

I was pretty puzzled by the new measures made by PAP government with regards to the car loan policy. I couldn't really figure out exactly what they are trying to achieve.

COE prices have increased recently due to a curb on the number of COE issued. This is basically due to the corrective measures LTA has made due to the excessive number of COE issued prior to 2012. On the other hand, the demand on COE has increased due to an expanding population.

There must be an understanding that just like population, we cannot be expanding on the number of vehicles on the road forever. The primary concept of COE is to control the total number of vehicles on the road rather on the control of the prices. Is COE the best tool to control the number of vehicles on the road? It is supposedly to be so but there are other possibilities as well.

Nevertheless, if you want to control the number of COE issued, you will not be able to control the prices. That's basic economics. However, is COE bidding system efficient? I have been talking about pay-as-you-bid system vs the present system even since 1993. I shall not repeat on this again because apparently PAP won't listen and only interested in the revenue generated by this piece of paper.

I suspect PAP's recent measures on the restriction on the loans are aimed at curbing the demand of cars by the population. But look at the overall impact you will realize that this will further create a great divide between the rich and the middle-lower class.

Some may consider vehicles as "luxurious" goods and only those with money should buy it. I do not think so. Transportation needs via own vehicle is not merely "luxurious" goods like "jewelery" but may be basic needs for many people like salesman. This is especially so when our public transport system is really far from being efficient in such a small city state.

Sometimes you may wonder whether the allocation model for car ownership really makes sense when the rich could own not only one or two cars but a whole fleet of 5 to 10 within a small household while those middle lower class salesman who need their own transport vehicles are deprived of it.

Second hand car market is the only possible means for these people to fulfill their transportation needs. However, the recent measures put up by PAP government applies across the board! Why? If the aim is to reduce COE prices by curbing demand on new vehicles, why would the loan measures apply to the second hand market as well? Second hand car market is the "poor middle class people" market and most likely many people with various needs will not be able to meet the stringent loan restrictions.

Such measures are totally irrational and will further widen the wealth divide between the rich and the middle-lower class. You will see more and more rich families owning more cars which they don't really need (eg. kept in the garage most of the time) while those with real needs are deprived of it.

Curbing demand on the second hand car market really serve no purpose on the two parameters: Total number of Cars and prices of COE.... unless the PAP government is thinking of crashing the second hand car market so that more people will scrap their old car instead of selling off at second hand car market. It is only then they could increase the supply of COEs to the market and reduce prices...but wait, who will benefit? The rich!

We will end up with a totally skewed market situation where all resources will be allocated to the rich while the middle-lower class who may have even MORE VALID need of car ownership will be deprived. Such scarce resource allocation situation will only further inefficiency as well as social tension and instability due to wealth and income inequality; not only in terms of monetary terms but totally lopsided resource allocation that resulted in wastage.

PAP government is not doing anything good by applying such measures across the board. Second hand car market is the indirect means of "fair" resource allocation to the middle class who can't compete with the rich on COE bidding. I would suggest that loan requirement should be set at a max of 80% instead of 50% for second hand car market. At the very least, this will give the middle class a chance to meet their needs instead of squeezing them out of car ownership totally.

There are other issues about the COE and car ownership allocation but I would not want to comment on these for the moment. Let out MPs in parliament a chance to come up with their views, right? :)

Goh Meng Seng