Bank Indonesia Plans New Rule to Avert Possible Property Bubble
In order to avert a potential bubble in Indonesia's property sector, Bank Indonesia (the central bank of Indonesia) is planning to further tighten its monetary policy in the sector. After having raised the minimum down payment requirement on housing loans to 30 percent for first home ownership (thus a loan-to-value ratio of 70 percent) in June 2012, Bank Indonesia now intends to prohibit credits for the purchase of a second, third (or more) house that has not been built yet (still in the preconstruction phase). This new rule is expected to be introduced this month.
This new rule is considered to have an impact on Indonesia's property sector as the majority of property sales is financed through bank loans, part of which constitutes sales that involve second or third home ownership. If sales will indeed fall, some property companies - that lack sufficient internal cash reserves to realize projects - may need to change tactics as it is common in Indonesia to sell houses or apartments prior to construction. Funds that are generated through these sales are then used for construction of the project. When it is bought by an end-user, the central bank has no concerns. However, in a city like Jakarta where many property projects have been (or are being) contructed, it frequently happens that new apartments are hunted for by (speculative) investors and switch ownership several times ahead of construction, each time becoming more expensive.
Credit loans for property in the preconstruction phase for first time home buyers is still allowed but the central bank wants the amount of credit to match the phase of construction. If for example the property's construction is finished for 50 percent, credit loans can amount to 50 percent as well.
Earlier this year, Bank Indonesia raised the minimum down payment requirement for the purchase of a second house or apartment (bigger than 70 m²) to 40 percent as the institution was concerned about sharply growing credit flows. The country's property sector grew about 25 percent in the last three years. Besides the central bank's efforts to curb property demand, the recent higher benchmark interest rate (BI rate) is also a problem for the sector's growth as it makes mortgages more expensive. Bank Indonesia increased its BI rate to 7.25 percent to combat high inflation and support the rupiah.
Whether Indonesia's property sector is headed for a bubble is up to debate. Various analysts deny this scenario, while others express their concern about a possible bubble. It is a fact that land prices and property prices have increased sharply in recent years (especially in bigger cities). However, Real Estate Indonesia (REI) claims that demand for housing by far exceeds supply resulting in a backlog of 15 milion houses in 2013. Per year, Indonesia needs 700,000 houses according to the institution. What goes against the bubble theory is that most newly built property is sold. For example, about 95 percent of this year's newly built apartments in Jakarta have been sold, mostly to end-users despite new policies of Bank Indonesia that aim to curb property demand.
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