CAR OWNERSHIP COST AND HOUSING PRICES IN SINGAPORE

Abstract

In the pursuit of a fast-paced and hectic life, existing roads and transit systems is overloaded on a daily basis. To counter traffic congestion problems, the Vehicle Quota System (VQS) was implemented by the government, which led to the compulsory acquisition of the Certificate of Entitlement (COE) through a bidding process. The limited land supply in Singapore, coupled with growing affluence among its people, have driven car demand and COE prices upwards. Affordability and equity issues regarding VQS are controversial, but it cannot be denied that cost of car ownership in Singapore is extremely high. This paper seeks to discuss the extent to which a change in car ownership costs affects housing price distribution based on the proximity from the central business district (CBD). The bid-rent theory suggests that property price and demand decrease as the distance from the central business district (CBD) increases due to higher commuting cost. However, the cost of car ownership is likely to be endogenous and correlated with various unobserved factors that also contribute to a change in the house price gradient. Since COE is a unique feature of Singapore’s car registration process, this study adopts COE premiums and other quarterly macroeconomic data to test the causal relationship with housing prices in the Core Central Region (CCR), Rest of Central Region (RCR) and Outside Central Region (OCR). Cost of car ownership is measured by the COE premiums which is the acquisition cost. This study examines the relevance of the bid-rent theory in local context, comparing housing price changes over different distance from the city centre. Through a VAR model, the results conclude that cost of car ownership indeed affects housing prices, with more significant responses observed for housing prices within the Central Region. This suggests that an increase in car ownership costs will cause individuals to be more willing to pay to locate near the CBD.