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Thursday, November 14, 2013

Good debt, bad debt

Published: Saturday November 9, 2013 MYT 12:00:00 AM 
Updated: Monday November 11, 2013 MYT 9:42:41 AM

Car taxes should be reduced to boost home ownership

THE papers recently reported that Malaysia was ranked the second-most expensive country to own a car. This interesting report caught my attention and also sparked some discussion online.

It was started with a web post titled “The Ten Most Expensive Places to Buy a Car” published by a weblog called Jalopnik, a popular American automobile website that has wide following. In that posting, they took a particular imported car model as an example, and ranked Malaysia as No. 2 in the top 10 list of countries with high-priced cars, just behind Singapore which discourages car ownership to promote public transportation. Other places on the list are Indonesia, Nicaragua, China, Brazil, United Kingdom, St Kitts and Nevis, North Korea and Cuba.

So, what makes our car expensive? The obvious explanations are the tax rate and excise duty amount. According to Malaysian Automotive Association (MAA), the excise duty imposed on cars ranges from 65% to 105%, on top of the 10% sales tax.

Take Honda Civic 1.8S, an international car model, as an example. The car costs around RM110,000 in Malaysia, but only about RM63,000 in Australia and can be as low as RM58,000 in the United States.

What does this 40% to 50% difference in price means to us? Let’s do a simple calculation on the loan repayment for the Honda Civic mentioned above. If we take up a 90% financing with an interest rate of 3% and loan tenure of 7 years, the monthly instalment will be RM1,426. Assuming the same loan term and interest rate, it costs us only RM817 to buy a Honda Civic in Australia and RM752 in United States.

If our car price is the same as that in the United States, the savings of about RM674 per month (RM1,426 - RM752) could have been invested in getting appreciating assets, such as a home. Based on the mortgage instalment table, RM674 per month allow us to get a house loan of RM140,000, based on a 30-year term loan at an interest rate of 4.2%.

In short, if we could cut the amount of commitment to finance our car loan without including other car expenses such as petrol, maintenance, parking fees etc, we could either save RM674 every month, or use the savings as an instalment that equals to a home loan of RM140,000.

Our Prime Minister in his recent budget announcement, made known the possibility of implementing the Goods & Services Tax (GST) at 6% in April 2015. Malaysia Automotive Institute CEO Mohamad Madani Sahari commented that this may lead to a 4% car price reduction once GST kicks in to replace the current 10% car sales tax.

Last year, actual sales of passenger vehicles in our country reached 552,189 units amounting to a value of RM74.85bil, and the excise duty collected was RM7.14bil. Imagine the results we can gain in reducing household debts, and housing the nation if the car price is reduced. The rakyat can place these RM7.14 bil or even part of the RM74.85bil on housing instead of cars, or treat it as part of the household savings.

In my last article, I mentioned that the value of cars depreciates 10% to 20% per year based on car insurance calculation and accounting practice. It means that the second largest household debt component in our country, about RM145bil or 26.5% of the total household debt, is paid for an asset that is contracting in value every year, which can be dubbed a “bad debt”.

In contrast, if part of this “bad debt” can be converted into “good debt” such as housing loan, which has underlying assets that is likely to appreciate, it will free up more resources for household financial planning.

Citing the earlier example in this article, the difference of RM52,000 in car value resulting in a possible additional RM140,000 in housing loan with the same monthly repayment amount, gives us more choices in terms of the location and type of houses we can purchase.

Given a choice, would you prefer to place your money on an asset that depreciates over a short period of time deemed as “bad debt” or commit on a “good debt” which is to purchase a house or asset that has the possibility of appreciating in the short term and, most definitely, in the longer term?

With the recent budget announcement, the Government has signalled a very clear move to rationalise subsidies and taxes. It would be great if the Government will continue to do so, and also to rationalise and reduce the taxes on cars, to enable the rakyat to afford homes.

FIABCI Asia-Pacific regional secretariat chairman Datuk Alan Tong has over 50 years of experience in property development. He is also the group chairman of Bukit Kiara Properties. For feedback, please email

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