Indonesia Relaxing LTV; Demand for House Ownership Credit (KPR) to Grow?
By relaxing the loan-to-value (LTV) ratio, the central bank of Indonesia (Bank Indonesia) expects to see House Ownership Credit (Kredit Pemilikan Rumah, abbreviated KPR) growth to accelerate by an additional 5 percent. Up to April 2016, KPR growth was recorded at 7.61 percent (y/y) only, down significantly from the years 2012-2013 when - amid the glory years of property development in Indonesia - KPR growth touched figures of between 30 - 49 percent (y/y). Back then concerns emerged whether Indonesia was about to experience a price bubble in the property sector.
Due to these concerns, Bank Indonesia decided to tighten the LTV ratio in mid-2013 with the consequence that the nation's property sector immediately started to cool; demand dropped and therefore many property developers started to postpone the construction of new property projects. The slowdown in Indonesia's property sector was also the cause of the nation's overall economic slowdown, curtailing people's purchasing power and consumer confidence.
In an attempt to support the country's property sector again, Bank Indonesia then raised the LTV ratio for home mortgage loans (using conventional financing) in June 2015, thereby cutting the obligatory minimum down payment for first home buyers to 80 percent (from 70 percent previously), for second home buyers the LTV was raised to 70 percent (from 60 percent previously), and for third home buyers it was raised to 60 percent (from 50 percent previously). This move was warmly welcomed by Indonesian property developers. However, it did not really manage to boost people's demand for property as the overall economy remained bleak. Therefore, KPR growth continued to slide, continuously, up to the present day.
Last week, however, Bank Indonesia announced that it, again, decided to raise the LTV ratio for the purchase of houses in a bid to boost Indonesia's sluggish property sector. Per August 2016 Indonesian home buyers will only have to cover a down payment of 15 percent for the first house, 20 percent for the second house, and 25 percent for the third house (all are five percent lower compared to the current down payment requirements). Bank Indonesia stated that a strong property market will cause a multiplier effect in Indonesia's economy as strong house sales will also boost demand for cement, ceramic, aluminum, consultancy services, and creative industries. With the setting of a LTV ratio of 85 percent for the purchase of a first home, Bank Indonesia hopes to see KPR growth back in double-digit figures soon.
Read more: Indonesia's Property Sector
However, another obstacle that undermines demand for property is that interest rates on KPR schemes are traditionally high (balancing between single and double digits) and this forms a major burden for Indonesian home buyers, the majority of whom use KPR from a financial institution to finance the purchase (the government provides subsidy for the low-income group that uses KPR to finance their first home). Although Bank Indonesia gradually, yet aggressively, cut its key interest rate (BI rate) from 7.50 percent in January 2016 to 6.50 percent in June 2016 lending rates have not fallen that sharply. Earlier this year, Indonesia's financial authorities also announced that they are considering to cut banks' net interest margin (NIM) to below 4 percent in a bid to cut lending rates to single digit margins.
Consumer Credit Indonesia (in IDR trillion):
| Type | 2013 | 2014 | 2015 |
| House Ownership Credit (KPR) | 268.8 | 302.9 | 326.3 |
| Apartment Ownership Credit (KPA) | 12.0 | 13.2 | 13.0 |
| Shop-house Ownership Credit | 25.0 | 26.0 | 26.6 |
| Motor Ownership Credit | 104.5 | 123.2 | 120.6 |
Source: Bisnis Indonesia