Easy loans, growing wealth fuel car demand

By Christopher Tan, The Straits Times, 21 Apr 2012

AN ENTRY-LEVEL car like the Toyota Vios is around $112,000 today, while a compact family mover like the Toyota Wish is close to $170,000.

Just five years ago, the Vios was as low as $50,000 and the Wish, below $70,000.

Why are people still buying cars when prices have risen to such unearthly levels?

Although there may well be a long list of factors influencing the startling consumer behaviour, the main ones are easy loans, rock bottom interest rates and growing wealth.

Since the Government deregulated car loans in 2003, banks have been falling over themselves to offer loans amounting to 100 per cent of the car price, with a repayment period of 10 years.

Also, with the smaller car market today, lenders are fighting tooth and nail to disburse loans. Cash rebates are among extra sweeteners being bandied about.

One credit dealer even posted on a popular car trading site that it will lend to borrowers with a bad credit history.

On top of that, interest rates for such loans are at a low 1.88 per cent. Unlike housing loans, car loan rates are locked in, so there is no risk of having to fork out more on monthly instalments down the road.

This relatively cheap and easy financing is also partly fuelling a 'trade up' to premium models, says Mr Ron Lim, general manager at Nissan agent Tan Chong Motor.

'At $100,000, assuming 100 per cent 10-year loan with 1.88 per cent interest rate, monthly instalment is $990,' Mr Lim notes. 'At $170,000, the monthly instalment will work out to $1,683.

'Upfront, to jump from $100,000 to $170,000 seems daunting. But when it's broken down into monthly instalments, the absolute monthly increase is only $693.'

Motor traders say current buyers of premium cars are polarised: those who pay cash and those who borrow to the hilt. Those in-between are getting fewer and fewer.

'So don't be surprised to see more and more employees driving the same class of cars as the boss,' quips Mr Lim.

Then, of course, there is the wealth factor. According to Boston Consulting Group's Global Wealth 2010 Report, Singapore has the highest proportion of millionaire households in the world (11.4 per cent), with the number of millionaires growing by one-third in 2010 alone.

Mr Zafar Momin, who teaches strategy implementation at the Nanyang Business School and who was a former automotive expert with Boston Consulting Group, observes: 'I believe the affluent buyers in the market are less sensitive to price; and there might also be corporate buyers who are obtaining vehicles for their executives regardless of price, via leasing schemes.'

On a more macro level, the growing Singapore population and an expanding cohort of car owners in recent years add to the underlying demand for cars.

In 1994, when certificate of entitlement (COE) prices were last as high as they are now ($64,000 for small car COEs; $92,000 for bigger car COEs), Singapore had 3.42 million people. The population has since grown by 52 per cent to 5.2 million.

And there are about 600,000 cars on the road today - almost double 1994's figure.

The fundamentals for strong demand notwithstanding, industry watchers say the current buying trend is unhealthy. It will drive COE prices to $100,000 and beyond, say motor traders.

But prices will head back to earth - possibly as fast as they have risen - from around 2014. That is when COE supply is expected to start expanding.

Wealthy buyers, says Mr Momin, 'do not feel the need to defer their purchases'. But other consumers buying at current prices 'will obviously regret when prices ease in coming years'.

COE supply will shrink further before expanding, though.

Tan Chong's Mr Lim expects COE supply for cars up to 1,600c - the mainstay of most car buyers - to fall by 55 per cent in the second half of this year.

The second half will also see the current 1.5 per cent allowable vehicle population growth rate slashed to 0.5 per cent.

That prospect has perhaps triggered some panic buying now. And with that, a self-fulfilling prophecy of COEs heading farther north in the making.

Dr Lee Der Horng, transport researcher at the National University of Singapore, reckons more COEs can be released in the near term.

He notes that a number of new road projects have been announced, while traffic flow enhancements - such as widening of expressways and junction improvement works like the Woodsville interchange - have been carried out.

Also, traffic information is being bolstered to help motorists avoid congestion.

'These may offer some justification to increase or maintain the current 1.5 per cent annual allowable vehicle population growth rate,' he says.

Luxury cars nudging cheaper cars off road

Upmarket marques now make up 45% of sales in up-to-1,600cc category
By Christopher Tan, The Strait Times, 21 Apr 2012

PREMIUM marques are crowding out the bread-and-butter brands in the small cars category as certificate of entitlement (COE) prices zoom north.

According to the Motor Traders Association (MTA), premium and luxury brands made up 45 per cent of sales in the up-to-1,600cc segment in the first quarter.

In the same period in 2007, they had a negligible 0.3 per cent slice of the segment.

COE prices for the small cars category, seen as the category for the most affordable cars in Singapore, are now hovering above $60,000, compared with $5,000 five years ago.

Premiums have soared because the supply of COEs - which buyers need to secure before they can own a vehicle - has plunged, from more than 100,000 in 2007 to no more than 25,000 this year.

Supply has shrunk because fewer cars are being scrapped and because the annual allowable vehicle population growth rate has been cut.

With this development, premium cars like Mercedes-Benz, BMW and Volkswagen - among the first to downsize their engines following the 2007 oil shock and 2008 financial crisis - are charging ahead at the expense of historical staples such as Toyota, Nissan and Hyundai.

Sellers of upmarket cars have fatter margins to outbid rivals for COEs. 'Very soon, this segment will be for only rich people and rich companies like taxi operators,' quipped a motor trader.

The up-to-1,600cc segment has shrunk on the whole too. In 2007, it accounted for 52.5 per cent of total car sales. Today, it has slipped to 46.2 per cent, according to MTA data.

Buyers and sellers of bigger and more luxurious cars are also outbidding the others for Open COEs, which can be used for any vehicle type but end up almost exclusively for bigger cars.

The Open COE premium is now $92,000, compared with around $12,000 in the first quarter of 2007.

Despite the stratospheric prices, well-heeled buyers are still flocking to showrooms. Last weekend, premium marque dealerships collected substantially more orders than usual, with models like the BMW 3-Series and Mercedes-Benz C-Class leading the way.

A 1.6-litre 3-Series from BMW due to arrive late this year will expand the premium brands' presence in the bread-and-butter segment and drive up COE prices further.

'People should stop buying cars now, then COEs will start to fall,' said the boss of a continental dealership who did not want to be named. 'I sell cars for a living. I should not be saying this, but please, advise people to hold back.'

Industry observers said it is no longer clear if high COE prices are fuelling the demand for premium cars - because consumers do not find it worthwhile to use an expensive COE for a cheap car - or the demand for upmarket brands is driving up COE prices.

But one thing is for sure: Car prices are near record levels. A Toyota Corolla 1.6 now costs $123,000 - a whisker from its all-time high of $130,000 in 1994. That was when the premium for cars up to 1,600cc was below $60,000 but car registration taxes amounted to around 200 per cent of the open market value (OMV), or roughly the cost of a car before taxes.

Today, these taxes are 120 per cent of a car's OMV.

The sky-high prices are driving mass market buyers into a corner. Retired engineer Lee Kok Meng, 55, said he is looking to change his 81/2-year-old Toyota Camry, 'but it looks like prices are beyond my reach now'.

'I have a year and a half to consider whether to continue driving or take public transport,' he added, referring to the time left before the COE of his car reaches the end of its mandatory lifespan. 'And I think I am not alone in this.'

He said the COE system favours wealthier buyers, and it would be fairer to peg actual premiums payable to the open market value of each car so as to create 'a more level playing field'.

Sellers of budget brands have also taken a beating. The Chinese brands have almost ground to a halt, with Geely having exited the market.