With sustained economic growth encouraging an expanding middle class, while the nation’s demographic composition implies that there will be millions of first-time home buyers, Indonesia’s residential property sector has plenty of room for growth in the decades to come. While Indonesian authorities tried to curb domestic property demand – particularly due to the excessive price growth – in the years 2013 and 2014 to avert the possible bursting of a property bubble, the same authorities started to implement measures to boost Indonesia’s property sector in 2015 and 2016 after growth in the sector had slowed considerably amid the country’s economic slowdown, and dragging down other sectors within the Indonesian economy (for example the ceramics and cement industries).

After the Indonesian economy experienced a sluggish year in 2009 due to the impact of the global financial crisis, the economy thrived again at +6 percent (y/y) levels in the years 2010-2012. One of the sectors that grew rapidly amid robust macroeconomic growth was Indonesia’s property sector (in this article we focus on the residential property sector). Listed property developers on the Indonesia Stock Exchange posted impressive corporate earnings in the years 2010-2013 (and these earnings were well received by investors, hence shares of property developers surged). Meanwhile, Indonesia’s property prices surged accordingly in these years. It is estimated that between 2011 and 2013 average prices in the residential property sector of Indonesia surged by an annual 30 percent.

What Explained Indonesia’s ‘Hot’ Residential Property Sector in these Years?

There are five basic factors that supported impressive growth of the country’s residential property sector in the years 2010-2012. Please note that these factors are still relevant for future growth of Indonesia’s property sector.

Firstly, residential property growth requires macroeconomic growth (and stability) as per capita GDP, purchasing power and consumer confidence need to rise before an increasing amount of people can afford to buy a house. In this context, property developers will also be eager to invest (hence there consists a supply-demand chain). As mentioned above, Indonesia’s gross domestic product (GDP) growth recovered back to an annual +6 percent (y/y) growth pace in the years 2010-2012. As a result, about seven million people joined the ranks of the middle class each year. With expanding per capita GDP more and more Indonesians were in a position to purchase property (houses, apartments and condominiums) and as demand outpaced supply, there occurred soaring property prices. It is interesting to add that in 2012 few – to none – analysts, including those from the World Bank and International Monetary Fund (IMF), expected Indonesia’s economy to slow down significantly after 2013. Most analysts expected a temporary slowdown in 2013 but rapidly growing economic growth in the following years at +6 percent (y/y) levels.

Secondly, Indonesia has a favorable demographic composition. Not only does the country have a population that numbers over 255 million people (implying an enormous market) that is becoming wealthier over time, but it also contains a young population as about half of the population is below the age of 30 years. This implies that there will be many Indonesians seeking to buy their first property unit in the near to middle term.

Thirdly, in line with the global trend, Indonesia is also experiencing the process of urbanization. Currently, more than half of the Indonesian population lives in urban areas and it is estimated that by 2050 two-thirds of the Indonesian population will live in urban regions (United Nations estimate). Due to this rapid process of urbanization more and more houses, apartments and condominiums need to be built in Indonesia’s urban regions in order to meet future demand. This situation implies that the limited availability of land in the urban centers will give rise to rapidly rising property prices, while developers need to focus on vertical property development (apartments and condominiums). It will also give rise to an increasing amount of property projects around the urban centers or the development of new urban centers (the latter can occur near new infrastructure projects such as the Jakarta-Bandung high-speed railway).

Fourthly, Indonesia has to cope with a housing backlog of 13.5 million property units meaning demand is strong. However, this backlog refers to the lower and middle-segment housing and therefore all of the country’s major property developers are interested to build property to cater these lower income house seekers. Some property developers will turn to this segment (as demand for high-end housing fell steeply after 2013) but it is mainly the Indonesian government that is tasked to develop housing for the low and middle-income segments. In April 2015 Indonesian President Joko Widodo launched the “One Million Houses Program”. Through this program the government aims to provide adequate housing facilities to low income citizens. Widodo said he wants to see the construction of ten million new houses between the years 2015-2019 for the country’s low-income people. State-owned housing developer Perumnas is tasked with the construction of these ten million additional houses (and received an IDR 1 trillion capital injection from the government).

Fifthly, Indonesia’s residential property sector was able to expand rapidly in the years 2010-2013 due to Bank Indonesia’s relatively low interest rate environment. Between February 2012 and mid-2013, Indonesia’s central bank kept its benchmark interest rate (BI rate) at 5.75 percent, a historically low policy rate. As a result, Indonesian commercial banks saw their mortgage loans rise substantially. By May 2013, about 46 percent of banks’ total credit was allocated to consumers’ mortgage loans. Meanwhile, local property developers had access to relatively cheap funds for their property development projects.

BI Rate, Inflation and GDP Indonesia 2008-2015:

	2008	2009	2010	2011	2012	2013	2014	2015
Bank Indonesia Rate (% at year-end)	9.25	6.50	6.50	6.00	5.75	7.50	7.75	7.50
Inflation (annual % change)	9.8	4.8	5.1	5.3	4.3	8.4	8.4	3.4
GDP Growth (annual % change)	6.0	4.6	6.2	6.2	6.0	5.6	5.0	4.8

^{Sources: Bank Indonesia & BPS}

Policies that Influenced Indonesia’s Property Sector in 2013-2014

In mid-2013 there occurred a policy shift that would have a big impact on Indonesia’s property sector. Although in the year 2013 most listed property developers still posted great earnings, their shares started to tumble around halfway through the year. The reason behind this development were a number of policy changes implemented to avert the possible bursting of a property bubble. Concern about a property bubble rose as initially property prices continued to surge while the overall economy had started to slow. Moreover, Bank Indonesia detected speculative buying. Therefore, Bank Indonesia decided to introduce a tighter monetary policy (prudent monetary and fiscal policies have been a characteristic of Indonesian authorities in the post-Asian Financial Crisis era).

Whether there was indeed a property bubble developing in Indonesia in the 2012-2013 period remains unclear. Considering that domestic property demand remained high, while most purchases were done by end-users, Indonesian authorities may have overreacted (although property prices were indeed rising steeply it needs to be remembered that these rising prices came from a low base). However, Bank Indonesia was correct about speculative buying as it was common for property units to be bought and sold by non-end user investors (even before construction of the project had started). This gave rise to steep price hikes.

Bank Indonesia made several changes to its monetary policy in order to cool the nation’s property sector. In the second half of 2013 it raised the minimum down payment (DP) requirement for property purchases and curbed mortgages for second home ownership (to prevent an excessive build-up of housing debt). Local banks were also barred from providing loans for the purchase of properties that were still under construction (for second time, or more, home buyers). The higher DP requirement (or lower loan-to-value ratio) applied to properties measuring over 70 square meters, thus aiming specifically at the middle-upper end of the market.

The next policy change involved the benchmark interest rate. After the historically low BI rate at 5.75 percent, Bank Indonesia gradually, yet aggressively, raised its BI rate to 7.50 percent between June 2013 and November 2014. Although higher borrowing costs impact significantly on the property sector, Bank Indonesia the rate hike was not so much caused by concern about a property bubble. More importantly, the central bank tried to combat high inflation (caused by subsidized fuel price reforms), curtail Indonesia’s wide current account deficit, and to safeguard financial stability (particularly in support of the weak rupiah) amid growing global concern about tightening monetary policy in the USA (scrapping the US quantitative easing policy and hiking US interest rates would result in capital outflows from emerging economies including Indonesia).

In combination with political uncertainties (Indonesia’s 2014 legislative and presidential elections were a tight race between political parties and presidential candidates) as well as the continuation of Indonesia’s economic slowdown, these policy changes managed to cool growth in the nation’s property sector. Sectors related to property, such as cement and ceramics, slowed accordingly.

Efforts to Boost Growth in the Property Sector and Overall Economy

As Indonesia’s economic growth slowed between 2011 and 2015, Indonesian authorities were eager to implement policies that could boost growth. With limited room to cut the key BI rate (due to high inflation, the wide current account deficit and heavy external pressures amid looming higher US interest rates and the negative impact of China’s economic slowdown), Bank Indonesia raised the loan-to-value (LTV) ratio for home mortgage loans per June 2015, thereby reducing the obligatory minimum DP for first home buyers (a move very much welcomed by Indonesian property developers). The maximum LTV ratio for the purchase of a first home was raised to 80 percent (from 70 percent previously), while for second home purchases the maximum LTV ratio was raised to 70 percent (from 60 percent previously). Lastly, the new ratio is 60 percent (from 50 percent previously) for third homes. This applies to properties above 70 square meters utilizing conventional financing.

Secondly, the Indonesian government decided in mid-2015 to allow foreigners to ‘own’ luxurious apartments with a minimum value of IDR 10 billion (approx. USD $735,000; a ridiculously high price for Indonesian standards) under the so-called ‘right-of-use’ category, implying a revision of Government Regulation No. 41/1996 on Housing for Foreigners Residing in Indonesia. It needs to be emphasized, however, that this is not the ‘right of ownership’. But there are some attractive changes for foreigners: the revision will cause an open-ended duration of the ‘right-of-use’ and this right is inherited by foreigners’ heirs. It is unclear whether this new policy will manage to boost Indonesia’s property sector as there are few developers that focus on the construction of luxurious apartments. In fact, there are few existing apartments in Indonesia with a price tag of IDR 10 billion. It also remains unclear whether a foreigner can buy a mortgage to purchase the apartment. We expect it would boost foreigners’ demand for luxurious apartments if these expats can use mortgage facility from a local bank.

Later in 2015, the Indonesian government also announced it allows foreigners (those non-Indonesians who live or work in Indonesia or in other ways bring advantage to the country such as investors) to own landed houses in Indonesia, also under the ‘right-of-use’ category, for a period up to 80 years. Based on the new regulation, signed by President Widodo in December 2015, an expat can buy a landed house under the right-of-use category for an initial period of 30 years. After this period, the foreigner can extend it twice, once by 20 years and then extend it by a 30 more years (hence ownership can reach a maximum of 80 years). Similar to the luxurious apartments ‘ownership’ of the house is inherited by the foreigners’ heirs.

However, if the foreigner (or its heir) decides to leave Indonesia to reside in another country, then he/she needs to release or transfer the ownership rights to another person who meets the requirements to own property in Indonesia (this can be another foreigner or an Indonesian citizen). This transfer need to happen within one year after the foreigner departs from Indonesia. If ownership is not released within one year after the expat has left Indonesia, then the Indonesian government has the right to confiscate the house.

Fourthly, Indonesia’s Finance Ministry announced that the government decided to raise the threshold for the imposition of the country’s 20 percent luxury tax in November 2015. Previously, property worth over IDR 2 billion was subject to this luxury tax. The revised regulation puts the threshold at IDR 10 billion.

Lastly, the Indonesian government announced in January 2016 it is to offer a tax incentive for Indonesia’s first-time home buyers that have a maximum monthly income of IDR 7 million. Previously, the subsidized mortgage was only available to those that had a monthly income of IDR 4.5 million. The Indonesian first-time buyers are eligible to obtain a subsidized mortgage lending rate (this incentive falls under the Housing Loan Liquidity Facility (Fasilitas Likuiditas Pembiayaan Perumahan, abbreviated FLPP). In other words, more first-time home buyers (lower and middle income segments) will be able to enjoy cheaper lending rates.

Key Points:

• Robust macroeconomic growth, a large (and young!) population, urbanization and government support are key ingredients that should manage to boost Indonesia’s residential property sector in the years to come.

• The recent economic slowdown has managed to weaken Indonesia’s purchasing power and consumer confidence. Although economic growth is expected to accelerate in 2016, it may still take some time for purchasing power and consumer confidence to rise to previous heights.

• New property development projects are more and more undertaken in satellite cities around Jakarta (for example Tangerang or Bekasi) or the bigger cities in other parts of the country (for example Surabaya, Balikpapan, Makassar or Bandung), rather than in Jakarta (that has shown signs of saturation). Another development is that more and more projects are targeted at the middle or lower income segments.