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Retrospective – Reviewing the COE system and what more needs to be done


In one of our previous articles, we highlighted clear flaws with the COE system and called for urgent reforms. However, we were not too hopeful, citing Minister of Transport Lui Tuck Yew’s statement that the COE market will not undergo any changes in the near term.”

A mere six months later, we see the first welcome change to this flawed COE system, and hopefully, this is a sign of things to come.

The new change stipulates that cars will no longer be categorised based solely on the engine capacity but also by their engine power. This is a change that is clearly long overdue, and gave rise to absurdities such as the Volkswagen Scirocco and Volvo S80 running wild in the streets of Singapore on their Category A COEs, which are supposedly for budget cars.

While we at DollarsAndSense.sg are glad to be among many observers to have pointed out this problem, we by no means expect the system to be perfect. Rather, our website is an existence proof that flaws identified by the layperson based on sound logic and economics principles are very much real, and that the government is definitely not always right, despite their best efforts at appearing so.

 

So, what else needs to be done?

We revisit the two other points that we previously highlighted. We believe they still hold true.

 

1. Why are you able to borrow money from the bank to pay for the COE?

This is something that is really illogical to us. Is the COE a form of tax? And if it is so, why are car buyers able to add the price of the COE to the overall price of the car, and then to borrow money from the bank to pay for it?

We use a similar example. For the purchase of a property that requires stamp duty to be paid, IRAS has made it very clear that the stamp duty tax is an “upfront cost that a buyer has to consciously set aside” (refer to question 39 if you are interested). It is not to be added to the overall price of a property, and the mortgage for the property will not include the tax.

If the regulation imposed on an actual financial asset (or investment) is such that upfront tax cost has to be paid for directly, and not added to the overall price, what more for a fast depreciating asset like a car and its COE? Being able to take a loan out for your COE (which is not even an asset to begin with and cannot generate any form of passive income) is a horrible concept and separated from any element of financial prudence.

We believe that if this policy were to be changed and car buyers were not allowed to borrow from the bank to pay for their COE, COE premiums will drop significantly and naturally (in a free market sense). Do away with this ‘false inflation’ , we say!

 

2. Why do COE buyers get their pro rated COE value back when giving up their car?

Let us pose a scenario. Would you pay us $50,000 for an object that has a remaining lifespan of 5 years (we have already used it for 5 years after buying it for $100,000), when the price of the object is $101 with a brand new 10 years lifespan?

Even though this clearly does not make any economic sense, it is nonetheless how the COE system is currently operating. Car buyers who are holding on to expensive COEs can easily “sell” these COEs back to the government and get a brand new 10-year COE when prices are low. This creates a cyclical effect whereby more COEs are given up when prices are lower, thus increasing the supply, and hence driving prices further down, which induce more people to “sell” their existing COEs.

The opposite effect holds true when prices are increasing.

This policy of returning the pro-rated COE value back to those who give up their cars creates a very unhealthy environment for the market. Car demand is extremely cyclical in Singapore and car prices are highly volatile.

A better solution would be to allow a car buyer to buy a COE that is transferable to another car (should the buyer switches cars), but not to allow him to “sell” back the COE to the government. If 10 years is deemed too long, 5 years COE options can be introduced.

 

Solution 2 hinges on Solution 1

The reason why the government has to refund car owners with their pro rated COE value is because these owners have taken out a loan, which also includes the cost of their COE. If the remaining COE value were not returned when a person gives up their car, it would be difficult for them to repay back the bank loan.

This reinforce what we suggest, that the amount to be paid for COE should not be something that is “borrowable” to begin with. By allowing this to happen, the government has to refund COE residual value, which leads to other implications such as a cyclical economy for vehicles and that translates into an unhealthy environment for many businesses.

We hope this article provides some insight to the structure of our COE system and its assumptions and flaws. For more financial related articles and opinion pieces, you can follow us on our Facebook page.

 

 

Original photo by Benjamin Lim. Used with permission.

 

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