Indonesia's affordable housing schemes providing a step up

Unlike other global economies, Indonesia largely surfed over the 2008-09 financial crisis, with the economy bucking Western trends and going into a strong, expansionary mode – chalking up 6.5% GDP growth in 2011 and over 5% growth in the years since. This came in the wake of strong economic growth in the years prior to 2008 as well, leaving the Indonesian per capita income in 2013 at a level five times higher than it had been at the start of the new millennium. Budi Hadidjaja, president-director of Cowell Development, told OBG, “The construction of residential property has been one of the fastest-growing sectors in Indonesia’s economy in the recent year, as demand has surged significantly among Indonesia’s expanding middle class.”

As such, prices and supply jumped significantly with the result that there was considerable concern about the possible creation of a new bubble. Indonesians are fully conversant with the implications of such a phenomenon, too, after the devastating Asian crash of 1997-98 left the capital with a small forest of abandoned tower blocks and other developments. The government and the central bank, Bank Indonesia (BI), thus undertook a series of measures to take the heat out of the market. Now, the success of these efforts can be measured by the increasing calls from within the sector for a relaxation of the rules.

Off the Boil

BI has used two main measures to cool the market. The first, aimed more generally at controlling economic activity and inflation, was the manipulation of interest rates, which have been ramped up since 2012. In 2012, rates were 5.75%, rising to 7.5% by year-end 2013, then 7.75% briefly until February 2015 when they went back to 7.5%. This has had an effect on bank lending and annual credit growth, with global market ratings firm Fitch reporting the latter had fallen from a recent peak of around 20% in 2011 to just 5% in 2014.

With the US central bank also widely expected to raise interest rates during 2015, the pressure on Indonesia to keep rates high is also likely to continue to minimise capital outflows, even though the new president, Joko Widodo, wants to see a lower, easier credit environment in order to stimulate economic activity, particularly surrounding his infrastructure programme.

Despite rising in the latter months of 2014 on the back of fuel price rises, inflation does appear to be generally falling. Indeed, according to Statistics Indonesia (BPS) figures, there was mild deflation in December 2014, of 0.24%, as the effect of the fuel price rise worked its way out. Should this trend continue in 2015, then there may be good monetary policy grounds for the BI to continue reducing interest rates. The second measure, more specifically aimed at the sector, is a series of new rules on mortgages, altering the allowable loan-to-value ratios (LTVs).

New Rules

In June 2012, the BI introduced regulations requiring prospective buyers to come up with at least 30% of the property price as a deposit, a move that, while ensuring sounder loans, would also mean fewer being issued. Yet this move met with relatively little success, as the market continued to grow, even as mortgage rates also increased. BI figures showed that July 2013 mortgage rates for houses of more than 70 sq metres had hiked 25.5% year-on-year, while those for units between 21 sq metres and 70 sq metres rose 57.2% and those less than 21 sq metres saw an increase of 85.6% Both figures well exceeded the aggregate credit growth rate, which had been 20-25% over the same period. Clearly, there was still a lot of demand in the market, along with a strong desire for purchases.

As a result, from the start of October 2013 BI introduced new rules, targeting the purchase of non-primary residences. The LTV for second homes was reduced to 60%, meaning that prospective buyers would have to come up with 40% of the value of a second property, while subsequent properties would see an LTV of 50%. These buyers would also be obliged to declare any previous mortgages when taking out new ones.

The size of this multiple home market has been growing in recent years, with statements by BI to the local media suggesting the number of people owning more than one property had doubled between 2010 and 2012, with outstanding multiple mortgage loans worth $2.75bn by the end of that period. A rule was introduced prohibiting bank loans for unfinished residential properties, effectively ruling out off-plan sales to those who need to borrow money in order to pay for property.

Squeezing the Middle

With interest rates high and the BI’s moves to restrict mortgages, a considerable barrier for low- and middle-income Indonesians wishing to buy has been established. The impact of the regulations on businesses and developers, however, may not be as dramatic. BI’s fourth-quarter 2014 real estate sector report noted that the most important source of financing for developers during that period continued to be corporate internal financing. This indicates a feature of the Indonesian economy, where the banking sector has a relatively low penetration rate when it comes to businesses, particularly small and medium-sized enterprises. Consumers, however, turn primarily to mortgages for their real estate transactions, with 72.2% of those surveyed by BI using this source. According to BI, in the fourth quarter of 2014 home mortgages totalled Rp314.6trn ($26bn), up 1.68% quarter-on-quarter and outperforming overall bank lending growth of around 1%.

Helping Hand

Despite the growing use of mortgages, many Indonesians remain shut out of the housing market for other reasons. According to figures from the Ministry of National Development Planning, as of May 2014 some 70% of the country’s workforce was in the informal sector. This gives them a non-creditworthy status at most banks, with many turning to informal lenders. Nationwide, there is also a shortage of housing, with the ministry estimating less than 400,000 formal homes developed each year, while the number of new households increases by 700,000 to 1m a year.

One way in which the government is trying to help out low-income earners in their efforts to secure a first mortgage is the Housing Finance Liquidity Facility programme. Some 14% of all mortgages in the fourth quarter of 2014 were issued by banks under this scheme, which gives a fixed, 7.25%, 20-year mortgage to those low-income earners who qualify. The government funds up to 70% of the total mortgage amount, while also covering 70% of the risk via mortgage insurance granted by the state-owned insurer, Askrindo. Six national banks and 15 regional development banks are currently taking part in the programme.

At the same time, the government is also offering low-income earners low-rent housing, known as “rusunawa”, where rents are limited to $10-26 a month. The local government provides the land for this, and the central government provides the housing. “Self-help housing” is another alternative, with the government providing a cash injection of $1116 per house for lowincome earners to construct their own homes, or $660 per house for low-income earners to improve their existing accommodation. The government is also considering establishing a microfinance institution aimed at self-help housing, with microfinance being particularly successful in rural communities in recent years.