Singapore's sky-high car prices are a warning for global cities

By Nurin Sofia, Xiao Zibang and Joyce Koh

(Bloomberg) —Singapore media professional Ellie Lim gave up her plan to buy a new Volvo SUV to ferry her newborn baby when she realised it was going to cost her more than S$200,000 (US$142,000).

“I was quite shocked,” said Lim, 34. Coupled with high interest rates on car loans, fuel prices and maintenance fees, buying a new car is “a financially unsound decision,” she said. Why would you spend the cost of an apartment from the government’s Housing & Development Board for a rapidly depreciating asset? “These are all like HDB flats running on the road.”

Lim’s lament is a common one in Singapore, which strictly controls the number of vehicles on its roads by forcing buyers to bid for a limited quota of permits, making its autos among the most expensive in the world. Last month, pent-up consumer demand and a growing appetite for electric vehicles pushed the price of those permits to yet another record. But Singapore’s model of making cars a luxury, balanced by spending billions on a ubiquitous and efficient public transport system, is beginning to look less crazy as other global cities try to build more sustainable infrastructure.

“If you’re a city urban planner, you’d look at Singapore,” said Song Seng Wun, an economist at CIMB Private Banking. It’s “one of the only cities that can keep its car population down. You can’t build more roads without taking space and resources from others, so if you want to drive, pay.”

Singapore’s government controls traffic growth with a series of quotas and taxes that can push up the on-the-road cost of a car to five times the wholesale price in the country of manufacture. The biggest levy is the Certificate of Entitlement, which is set in a twice-monthly auction. The COE gives the right to run a vehicle for 10 years in Singapore. Once it expires, you either have to scrap or export the car, or buy another COE.

Today, bidding in the top category rose to a record S$110,524. Rates are likely to remain elevated until at least the end of 2022, according to economists and dealers.

“With more people back to work in offices and resilient household balance sheets, demand for big-ticket items like cars has rebounded,” said Selena Ling, Head of Treasury Research & Strategy at Oversea-Chinese Banking Corp. in Singapore. “It is challenging to call the top for now.”

Singapore’s Land Transport Authority said COEs are allocated via a market based mechanism. “The recent high prices are a natural outcome of the high demand, which has been sustained since 2H 2020,” the LTA said in an email.

Singapore is able to implement such an expensive car-ownership program partly because it’s a small island that has only two road links to neighbouring Malaysia. Most big cities have large hinterlands and more traffic running in and out of the city, so they have to rely on other mechanisms to curb growth, such as road pricing and vehicle restrictions.

“Issuing COE-like ownership permits in order to eventually restrict the car population may be a bridge too far for most cities,” said Chua Soon Ghee, a partner at AT Kearney. “What typically works better is providing more attractive alternatives to car usage such as improving public transportation or allocating more of the road to bicycles or pedestrians, and making car usage more expensive and inconvenient.”

London, for example, charges drivers 15 pounds (US$17.87) a day to enter the central zone during the week, compared with a top rush-hour fee of S$3 for the Singapore CBD, before rates were reduced temporarily because of the pandemic. New York is planning to adopt a similar system next year.

But increasingly, urban planners are advocating that the real solution to the pollution and waste from automobiles is simply to have fewer of them. Even all-electric vehicles use up resources and energy, usually to move just one person. A shift from private car ownership to flexible urban autonomous public transport systems has fuelled predictions that the world is close to peak car ownership, an idea that meshes with Singapore’s restriction on growth.

For most Singaporeans, that means sticking to public transport, taking taxis or using ride-hailing or car-sharing services.

“You don’t need to own a vehicle in Singapore,” said Walter Theseira, associate professor at the Singapore University of Social Sciences. “Unrestrained growth in the vehicle population would lead to a ridiculous amount of congestion.”

The city added 1,000 buses and 200 trains in the decade to 2021, and is building three new subway lines to ensure that 80% of households will be within 10 minutes’ walk of a station. All told, the government said it plans to spend more than S$60 billion on the rail network this decade. Each year, it also spends about S$2 billion on subsidising bus and train fares.

Despite packing 5 million people onto an island half the size of London, Singapore ranked 96 out of 416 cities globally in the TomTom traffic congestion index in 2019, the year before Covid disrupted transport. Last year, it was 88th out of 404.

Still, Singapore’s higher vehicle costs come with risks. Among them, soaring car costs can reduce the city’s competitiveness in luring international talent. The island was already the second-most-expensive place in Asia for expats to live and work after Hong Kong, according to Mercer’s most recent Cost of Living Survey.

Other costs are also rising as Singapore feels the effects of global inflation. Private home rents have skyrocketed and food prices were up 4.5% in May from a year earlier. Most Singaporeans are experiencing increases above the official inflation index and expect price pressures to continue for the next year, according to a survey by DBS Group.

For customer service executive G Dharshen, the rising costs mean he’s had to give up owning a car as the COE for his old Toyota Corolla Altis expired in May and he couldn’t afford to replace it.

“It was just not worth it,” said Dharshen, 27. He said even a second-hand car was not an option as sellers have increased prices in response to the growing cost of new vehicles.

One encouraging sign is that the government has begun offering incentives to switch to hybrid or electric vehicles. The LTA said it will add 12,000 charging stations in public housing car parks by 2025 and have 60,000 nationwide by 2030.

“Preferences are now trending toward electric-vehicle and hybrid-car models,” said Steven Teo, a managing director at car distributor Trans Eurokars Pte Ltd. Authorities in May reclassified electric vehicles with a power rating of up to 110 kilowatts into a more affordable COE category.

Meanwhile, some would-be car owners like Ellie Lim are biding their time in the hopes that prices will eventually ease off. A “weaker global outlook is likely to damp demand,” said Bloomberg Economics’ Tamara Henderson.

Lim currently takes taxis or borrows her father’s car. “You have no choice but to put up with inconvenience for now, praying that the prices will come down,” she said. “But it looks like they’re still rising. There are a lot of Singaporeans who can part with the money.”

© 2022 Bloomberg L.P.