BT: Lower ARF won't mean cheaper cars

Business Times - 01 Feb 2008

Lower ARF won't mean cheaper cars

Rise in COE premiums may offset tax cuts, say industry players
By VEN SREENIVASAN

(SINGAPORE) If you are holding out for lower car prices, now that the government has confirmed a 10 per cent reduction in Additional Registration Fees, you may be disappointed.
So say industry insiders, who point out that the impending cut-back in Certificates of Entitlement quotas could more than offset any savings to be had from lower registration taxes.
'Car prices will go up,' said Cheah Kim Teck, chief executive of Cycle & Carriage, which distributes Mercedes, Kia and Mitsubishi cars.

'What they (the government) haven't said is how drastically COEs will be cut,' he said. 'If you take the average OMV (Open Market Value) for a car at $20,000, a 10 per cent ARF reduction saves you only $2,000. But if the number of COEs is cut significantly, as we believe will be the case, you are talking about a potentially much greater jump in COE premium prices. Overall, the pain will be greater.'

All this comes after the government yesterday announced a slew of measures to reduce road congestion, including higher Electronic Road Pricing, lower vehicle ownership taxes and improvements in the public transport system.

Among the initiatives is a reduction in the ARF from the current 110 per cent of OMV to 100 per cent in March. Road taxes for vehicles will also be reduced by 15 per cent from July.

However, the number of new cars registered could be reduced as COE quotas are cut back over three years starting from 2009.

'The impact will depend on whether people hold back purchases,' said Say Kwee Neng, managing director of Vantage Automotive, which sells Peugeot, LandRover and Ford cars.

'On one hand, the reduction in COEs will raise premium prices. But on the other hand, demand could fall if people become more circumspect about purchasing big-ticket items in the current uncertain economic conditions. So it all depends on how these factors play out.'

The savings from ARF are also lower when they are spread over the life of the car, up until it is scrapped.

Currently, the Land Transport Authority pays a reducing percentage of the car's original OMV when the owner takes the car off the road permanently. This PARF ranges from 75 per cent of the original OMV for a car under five years old to 50 per cent for a car which is almost 10 years old.

Under the current system, a car with $10,000 OMV will attract an ARF of $11,000 (110 per cent). This means the owner will get a scrap value of $5,500 (50 per cent of original $11,000 ARF) when he scraps it in its 10th year.

But when ARF is reduced to 100 per cent of OMV in March, this ARF will be $10,000. But on reaching the 10th year, the scrap is $5,000 (again, 50 per cent of original ARF).

So the owner gets $500 less at scrap. And if this is factored into the original $1,000 he saved as a result of his ARF reduction, the net ARF savings work out to only 5 per cent .

So, the bottom line, say motor traders, is that the reduction in ARF is too minor to factor in buying decisions.

'All things being equal, the reduction in ARF should reduce the cost of buying the vehicle,' said Victor Tan, general manager of Champion Motors, which sells Suzuki vehicles. 'However whether the consumer ultimately benefits from this ARF reduction in terms of overall car price depends on the movement of the COE premiums, and when he scraps his car. Given that the government wants to cut the vehicle population on the road, the chances are that COE premiums will rise by a greater amount than the ARF reduction.'

He noted that a typical Category A vehicle (1600cc and smaller) would see a $1,200 to $1,600 reduction in ARF. But a $2,000 increase in COE premiums would wipe out this benefit.

Could buyers of larger cars benefit, then?

'Not likely,' said C&C's Mr Cheah. 'The reduction in the ARF for the Mercedes C200 would be about $3,500 lower. But if the COE premium goes up to $20,000, as was the case last year, from the $14,000 average now, you can say goodbye to your savings.'

Some motors traders pointed to what they saw as 'inconsistency' in the COE quota policy.
'They say there is overcrowding on the roads,' said Mr Say. 'But who was responsible for letting this happen in the first place? Why was the market flooded with COEs over the past two years? Yes, there is the replacement cycle, but surely one must be able to anticipate the results ahead, rather than make motorists suffer through this kind of feast and famine every few years.'

Traders said the fact that over 70 per cent of the cars on the road are under three years old further pointed to a sharp reduction in COE quotas.