How high can COE premiums go?

Will it really rise as much as $100K, a level last seen in 1994?

In a research report, DBS Research notes that fading low base effect arising from the COE premiums has been the factor behind recent moderation in inflation rate but that will have little impact when COE premiums have been marching steadily northward.

In fact, COE premium reaching the previous peak of about $100K in 1994, it said appears to be on the cards given the increase in recent tenders. 

Here are comments from other industry observers:

Leong Wai Ho,  Regional Economist,  Barclays Capital   

My sense is that COEs will continue their upward drift until the end of the year. Labour markets are tight and the outlook for discretionary spending remains strong. COEs for larger cars could even test the psychologically important level of SGDD100,000/quota in the coming months. The trajectory for inflation is also worrying - with 5% plus inflation to persist until July.

Ultimately, COEs are but one driver of inflation in Singapore. In the coming months, as the inflow of blue collared foreign workers are reduced by more stringent entry regulations and higher levies, wage and business costs are also set to go up over the next two years.

All this to us is pointing to higher inflation and a stronger SGD policy. 

Leslie Tang, economist, OSK-DMG

Domestic policies aimed at achieving certain social policies have had repercussions on the economy, particularly those aims at limited the number of foreigners, curbing car population and purchases of housing by foreigners. All these policies had the unintended outcome of driving consumer prices higher in Singapore. COE premiums can go higher as the supply remain limited by the number of cars scrapped so far. In fact, there is no reason why COE premiums cannot hit $100,000. Until consumers decide that this is a incredulous price to pay for a car, will COE premiums probably come off. But I don't expect any significant drop off in COE premiums until 2014 unless the govt. decides to release more COE supply, which is quite unlikely at this point in time. Maybe more curbs to car ownership and better, improved and more confidence-inspiring public transportation could help to dampen demand for private cars could be in the offering. 

Alaistair Chan, Economist, Moody's Analytics Australia

It is true that higher COEs have been pushing up inflation and was the main driver in March. But it is not the only driver. In fact, housing inflation still matters, even though it is declining. In March, transport contributed around 1.4 percentage points to the 5.2% y/y inflation rate, while housing contributed 2.3 percentage points.

It is hard to know how high COE premiums will go since the quantity auctioned is fixed and price moves in response. Hence stronger demand will push up prices quickly.