Buying a House in Indonesia Made Easier as BI Supports Economic Growth

Bank Indonesia will introduce this relaxation in June 2015 in a bid to join the government’s battle to combat slowing economic growth. Since 2011, Indonesia - Southeast Asia’s largest economy - has been plagued by slowing economic growth hitting a five-year low of 4.71 percent (y/y) in the first quarter of 2015.

The central bank’s prudent monetary policy is in fact partly to blame for slowing economic activity in Indonesia. With its key interest rate (BI rate) relatively high at 7.50 percent domestic consumption and business expansion is curbed. However, Bank Indonesia refrains from lowering its BI rate due to inflationary pressures, the wide current account deficit, and looming capital outflows ahead of further monetary tightening in the USA (higher US interest rates). Instead the central bank decided to relax loan requirements in a bid to boost credit growth and economic activity.

Indonesian banks that will be allowed to sell mortgages to first-home buyers with the DP at 20 percent are those banks that have a non-performing ratio of less than five percent in order to safeguard the quality of the loans. For most Indonesian banks, particularly the larger (listed) ones, this is no problem as they generally have NPL ratios of between 0.5 percent and 2.5 percent.

Martowardojo added that different requirements will be applied to second and third-home buyers. Currently, the loan-to-value ratios of mortgages for second home-buyers and third (or more) home-buyers is 60 percent and 50 percent, respectively.

According to the latest information from Bank Indonesia, prices of residential property in Indonesia rose 1.4 percent (q/q) in Q1-2015 (down from a growth pace of 1.5 percent q/q in the preceding quarter). Data from the central bank also show that loan growth in Indonesia has slowed considerably. In March 2015, credit expansion slowed to 11.3 percent (y/y), down from 12.2 percent in the preceding month, and well below Bank Indonesia’s full year 2015 target of between 15 and 17 percent.

Similarly, Bank Indonesia will broaden the deposit requirement for local banks’ loan-to-deposit ratio starting from June 2015 (banks’ securities will be included). Currently, the central bank requires local banks to maintain loan-to-deposit ratios in the range of 78 to 92 percent.

For foreigners it remains problematic to own property in Indonesia although President Joko Widodo is expected to allow foreigners to buy luxurious apartments in Indonesia’s larger cities from 2018 onwards.

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