Recent Changes to Rules for Car Loans

Mdm Speaker, as MAS had explained in its press statements, and as I had elaborated during the Committee of Supply (COS) last month, the restrictions on car loans were introduced for two reasons: first, to encourage financial prudence among consumers, particularly in light of the current prolonged period of low interest rates; and second, to moderate the demand for cars, which has been driving up prices of Certificate of Entitlement (COE) and car prices sharply, including over the last year. Higher COE prices contribute to a higher inflation rate and create negative spillover effects on the broader economy.

Er Dr Lee Bee Wah highlighted the plight of used car dealers. She did so during the Budget debate and she is asking about it now in this PQ that she has filed, and what we can do about that.

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As Members would know, to help the used car industry adjust to the new environment, MAS announced last Friday that it would lift the financing restrictions for two months for used cars that were acquired by dealers prior to the introduction of the restrictions. In making this decision, MAS gave consideration to the fact that demand had fallen more significantly for used cars, and also that the used car industry found it challenging to dispose of the inventory that was acquired at higher in built COE values before the introduction of the restrictions.

However, it is not possible to relieve the industry from the impact of the restrictions on a continual basis without undermining the policy objectives of promoting financial prudence, moderating the demand for cars, and cooling COE prices. So, MAS will not be extending the concession beyond this two-month period.

The two-month relaxation of the rules will in fact provide a good window for the used car industry to clear much of its previous inventory. Data from LTA indicates that of the 11,000 used cars acquired before the introduction of the restrictions, 4,000 were sold in the one month since the financing restrictions were introduced. So, 11,000 used cars were acquired before, and in the one month since the financing restrictions were introduced, 4,000 of these 11,000 used cars were sold. Based on this trend, and with the temporary lifting of the financial restrictions, dealers should be able to sell most of the remaining 7,000 used cars within the two-month window.

MAS will continue to monitor developments in the COE market and will recalibrate the financing restrictions for all cars, new and old, in response to market conditions – in particular, a sustained moderation in COE prices. But we will not for some time revert to the pre-February situation of having no financing restrictions on car purchases.

We understand that the used car business has grown in recent years and many dealers have done very well, especially when COE prices were moving up. The industry should take advantage of the temporary reprieve for its inventory, and adjust to the new reality in the car market. If the industry should eventually consolidate and employees are affected, the Government will do its part to help them through the transition, and to find new jobs in other industries.

Mdm Speaker, I would like to ask the Acting Minister how the Government came to this financing restriction of 50% to 60% to encourage financial prudence. Perhaps, the Government can shed some light on how it came to the financing limit of 50% to 60% and not 70% to 80% financing for vehicles. Secondly, the latest COE prices suggest that the COE prices have not come down very much. This seems to suggest that there is quite strong demand for vehicles. The feedback is that this car loan restriction policy has benefited those who are better-off, and younger citizens who may need a slightly higher loan would be disadvantaged. How can the Government assure Singapore citizens that the policy is not intended to be disadvantageous to those who are having this aspiration to buy a car?

Mdm Speaker, I thank the Member for his follow-up questions. On how the percentages for the loan limits were derived, it is really a judgement of looking at the past trends and at what is necessary in order to moderate the demand for cars, which is the objective of this whole exercise and review. Having looked at the current situation where we have very low interest rates and very easy financing, we did not feel that was prudent. And so we looked at how we can have appropriate adjustments to moderate the overall demand for cars, which was the intent of the policy. Based on that and the assessment on what is necessary, MAS felt that it was necessary to have something that was significant – not just a 10% to 20% adjustment. I think this would not have been sufficient to achieve the intent of the policy. We needed something that was more significant in terms of moderating demand.

We tiered it so that for those who are purchasing the smaller vehicles, there would be a higher loan limit. So, from that point of view, first-time buyers – people who are looking at buying a smaller vehicle – with the loan limit, while it is slightly higher, would still allow them to purchase a car with a higher quantum.

It is really a balance. As I mentioned earlier in my COS reply as well, these adjustments are not permanent. The policy will continue to be recalibrated and adjusted based on looking at how the COE market adjusts to these new policies. We have had only one month of data and I do not think we should judge the outcome of the policy just based on that one single data point. We will have to look, over a period of time, how the COE market adjusts and then if indeed the policy objectives are achieved, as I said earlier, MAS will be continually reviewing and adjusting its policies accordingly.

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Mdm Speaker, I would like to thank the Acting Minister and MAS for giving the second hand car dealers this 60-day breathing space. I have two supplementary questions. First, I would like to ask the Acting Minister why he has mentioned so soon that there will not be any extension to the reprieve? I would think that we should monitor and see whether there is a genuine reason for any extension or not. Secondly, if I heard the Acting Minister correctly, this curb is introduced in order to cut inflation. How effective would it be, because for those who need a car, they would still need to buy a car? This only adds on to their business costs.

Mdm Speaker, I will answer the two questions on the extension and why we have decided not to go beyond. We have made very clear that it is a two-month window. I think it is precisely because we have taken in the feedback, studied the issues very carefully, and worked out what would be a reasonable window to help the used car dealers deal with this particular problem where they have an inventory of used cars with a higher built-in COE value. We recognise that it poses problems for them because of the changes in policy, and we would like to help them clear this particular inventory. If Members look at the data that had been presented – 11,000 used cars purchased before; 4,000 sold within one month – I think two months is a very reasonable window. If Members also look at used car sales, in the past, it was about 5,000 a month. In the month since we introduced the financing restrictions, it has come down to about 4,000. Prices have softened somewhat – about 10%.

The used car sales are still happening. The market is adjusting. With two months, they should be able to clear the inventories that they have. The adjustment we are making now in providing this temporary lifting of two months is particularly to address this problem, and within this two-month window, the problem should be able to be resolved. That is why we have decided that the two-month window should be a definite period.

On the impact on inflation, yes, we are hoping to moderate the impact on inflation. The Member talked about business costs, but commercial vehicles are not included in the financing restrictions. Overall, by moderating the demand for cars, this will have an impact on COE demand and therefore, have an impact on moderating inflation as well.

Mdm Speaker, I would like to ask the Acting Minister two supplementary questions. First, with the car loan tightening policy requiring a much higher amount of payment in cash, I am concerned that those who are less cash-rich will resort to raise the necessary funds by taking

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up personal loans from banks or moneylenders. Personal loans now attract a much higher interest rate, averaging six to 12 times higher than car loan rates. This will add significant financial burden to consumers. I would like to ask the Acting Minister how we can prevent this situation from happening as we have seen in other countries when the loan-to-value (LTV) is very low.

The second question is on how to help people who need a car as an essential form of transportation. For those who need the car for family care-giving obligations or as part of their job requirements, I wonder whether the Acting Minister would consider a different category of loan financing. For example, giving up to 80% LTV for cars but capping the loan value to 50%, therefore creating a new segment of financing for low-cost cars.

On the first question of whether there are other means of financing that people will resort to like moneylenders and bank loans which would then circumvent the financing restrictions or put more pressure and add to the burdens, I think it is something which we will have to monitor. I do not think we have seen any signs of this happening. We would also have read the media reports of how financing restrictions have been extended to non-financial institutions as well. So, to the extent that we can, the financing restrictions have been extended. I do not think we have seen any signs of loan behaviours being driven to moneylenders. We will continue to monitor and make sure that that does not happen.

On the second point on whether we can extend the LTV for different categories of buyers to make it easier, in the end, it is really about managing the balance between achieving the intent of the policy and making sure that there are some exemptions that we can give to those who are deserving. We have already announced some of the exemptions earlier in the Budget and COS sessions. We should keep to the current position for the time being and look at the impact of the policy, whether it, indeed, achieves our policy objectives which are, as I stated earlier, to ensure prudence and moderate inflation. And then, we can adjust along the way.

Mdm Speaker, I thank the Member for the question. It was something that Mr Lim Biow Chuan also alluded to earlier in his follow-up question. As I said, we will continue to monitor developments in the COE market and we will re-calibrate our financing restrictions for all cars, new and old, in response to market conditions, in particular, if there is a sustained moderation in COE prices. We have just announced this policy. We have granted a temporary lifting of the financing restrictions for a particular objective, which is for the inventories that were built up. We would like to help the used cars dealers release these inventories without too much difficulty. Having taken this step, let us maintain the policy and look at whether it achieves its objectives over the coming months. MAS will continue to review the policy and re-calibrate based on the outcomes that it observes in the COE market.