Dealers cite car loan curbs for rise in sales of cheaper cars

[SINGAPORE] The re-classification of Category A Certificates of Entitlement (COEs) may be one reason for the rise in the number of cars with a lower open market value (OMV) registered, but some motor distributors believe the tough loan curbs are having a bigger impact.

They were responding to the letter from the Land Transport Authority (LTA) last week, which credited the introduction of a power cap, in addition to the usual engine-displacement criterion, for the rise in number of cars with lower OMV being registered.

The LTA had disagreed with a reader who said "the addition of an engine power criterion in Category A has not improved the demarcation between premium and mass-market cars".

In February, Cat A for cars under 1,600 cc was re-defined to include an engine output limit of 97 kW or 130 hp in a move designed to keep luxury models out of this small-car COE category. High-end cars had been blamed for high COE premiums in the past three years.

The LTA said in its letter: "The additional criterion has resulted in a significant decrease of almost 30 per cent in the median OMV of cars registered in Cat A over the past six months.

"Correspondingly, there are also now more cars with lower OMV of up to $20,000 registered in Cat A."

But some distributors say the rise in number of cheaper cars sold is more a result of the vehicle-financing restrictions introduced in 2013. Car buyers now need up to a 50 per cent cash downpayment, and to sign up for a maximum repayment period of five years. Before the change, it was possible to borrow 100 per cent of the car price, and pay up the loan over up to 10 years.

The managing director of a volume dealership said: "The loan curbs have not hurt the ability to buy a Cat A model as much as a Cat B model, simply because the latter costs more."

Someone who can no longer afford a new Cat B model will likely look to a cheaper Cat A car, he added: "He moves down the price range to a model that fits his budget, thus pushing up demand for Cat A cars."

The sales manager of a luxury dealership conceded that it was true that the re-categorisation had contributed to more lower-OMV cars sold.

"But from what we have seen, the main reason is still the financing restriction," he said.

To back up his argument, he pointed to the Cat A and B COE premiums from the past six months: In the last tender before the recategorisation, that is, the second tender for January this year, a Cat A COE cost S$72,290 and Cat B one, S$79,000.

In the most recent tender two weeks ago, Cat A COEs were S$62,890 apiece, and Cat B, S$65,001.

He said: "Cat A has fallen S$9,400 or 13.0 per cent, but Cat B has dropped by more - S$13,999 or 17.7 per cent. COE supply issues aside, it shows that indirectly, there is now less demand for Cat B, with its more expensive models, than for Cat A."

The gap between the Cat A and B premiums has narrowed, from S$6,791 in late January to S$2,111 late last month. In the past, when this gap became smaller, most prospective buyers gravitated towards Cat B because they perceived such models to be better value for money; this would then typically push up the big-car premium and widen the gap again.

The sales manager added: "So we will have to see in the next few rounds whether that happens. If it does not and the gap stays small, then it implies that demand for Cat B is softening, and that it is probably due to the loan curbs' impact on affordability."