Property market in Indonesia on a sustainable growth path rather than destructive bubble

Concerns have been raised over the last few months about a potential bubble in the property market in Indonesia due to a rapid increase in prices.

As the country develops into a better and stronger economy with businesses accelerating at a faster pace, there is also growing concern about the significant growth of property loans in the local banking system.
The World Bank first voiced such concern when it released the Indonesia Economic Quarterly entitled Pressures Mounting in March 2013. So far, most opinions from major local banks, national developers and various consultants tend to play down the issue, while the country’s regulators, such as Bank of Indonesia, the country’s Central Bank, and related government ministries, continue to take a cautionary approach while they monitor the property sector.

According to Anton Sitorus, head of research for Jones Lang LaSalle in Indonesia, the answer to the issue is not simple and it might depend on one’s perspective and way of thinking. ‘I am sure that most people would agree that the current condition of the property market is a lot different to what it was before the Asian Financial crisis in early 1998. While there has been a significant price appreciation in some property types, particularly landed properties and industrial land, in some locations, the overall macro conditions are more robust and relatively sheltered from any potential downturn,’ he explained.

He pointed out that based on data from the Central Bank, the ratio of property credit to overall bank loans is still below 14%, compared to 20% back in the middle of the 1990s, and property loans currently account for less than 5% of national GDP, compared to 11% in 1997, a year before the crisis.

‘Meanwhile, to tackle the issue of rapid price hikes, among other reasons, by irrational moves from speculative investors, the Central Bank introduced a maximum 70% loan to value (LTV) ratio for bank loans for first home ownership last year,’ said Sitorus.

‘This LTV regulation on bank loans is likely to be tightened further in September this year, especially for the second and subsequent residential property purchases,’ he added.

He believes that the property market in Indonesia will continue its positive trend, riding on the wave of economic growth, which is projected to remain strong over the short to medium term.
‘On this basis, we expect prices to continue to move up alongside demand expansion and higher buyer purchasing power. The market is not heading for a bubble but likely to remain on a sustainable growth path,’ he concluded.