Indonesia’s most aggressive monetary tightening since 2005 is set to slow economic growth without denting soaring property demand in the world’s fourth-most populous nation.
A young population, elevated inflation and property-price gains that outpace interest rates are spurring real-estate sales from Jakarta to Manado. Home prices in the third quarter probably rose 14.6 percent from a year earlier, according to a Bank Indonesia survey, while the Indonesian Real Estate Association predicts housing sales will climb more than 50 percent this year.
“Indonesia has a huge population, that’s a potential market for us,” said Setyo Maharso, chairman of the Indonesian real estate association, which predicts 2013 property sales will rise to 400,000 units from 260,000 last year. “For our buyers, as long as they have the ability to pay monthly installments, sales will keep increasing till the year end.”
With foreigners restricted from owning property in Southeast Asia’s biggest economy, Indonesia is confronting a surge in local demand rather than the capital inflows that spurred record home prices in neighboring Singapore and Hong Kong. After the central bank imposed stricter loan-to-value ratios for mortgages, persistent price gains may prompt the government to raise some real-estate taxes, PT Bank Danamon Indonesia said.
“By giving a luxury tax, especially for high-end properties, it would help to curb home-price increases,” said Anton Gunawan, chief economist at Bank Danamon who was a candidate for the No. 2 job at the central bank this year. “Returns from property remain high as there’s an expectation that home prices are still rising.”
Inflation eased to 8.4 percent in September after reaching a four-year high of 8.8 percent in August. Bank Indonesia forecasts inflation of 9 percent to 9.8 percent at the end of the year and has already raised its benchmark interest rate by 1.5 percentage points since early June to 7.25 percent.
“Even though the BI rate has been raised, mortgage rates won’t rise as high as surging property prices in certain areas,” said Anton Sitorus, head of research at the Indonesian unit of Jones Lang LaSalle Inc. (JLL) He expects mortgage rates to climb to an average of less than 11 percent, and estimates home prices will jump 20 percent to 30 percent a year in certain areas across Indonesia.
That compares with a return of 5.25 percent for a two-year term deposit at PT Bank Mandiri (BMRI), the country’s largest lender by assets, and a 7.3 percent yield for Indonesia’s 10-year government bonds.
Indonesia’s property stocks rose today, with the Jakarta Construction, Property, Real Estate Index climbing as much as 2.8 percent, more than twice the biggest intraday gain in the benchmark Jakarta Composite Index. PT Ciputra Development (CTRA) and PT Summarecon Agung (SMRA) advanced by at least 9 percent for their biggest rally in five weeks.
The property price gains reflect the resilience of domestic demand at a time when foreign investors have been selling the rupiah on risks posed by the current-account deficit. The rupiah has fallen more than 14 percent this year, the second-worst performer out of 24 emerging-market currencies tracked by Bloomberg.
Bank Indonesia cut its 2013 economic growth forecast last month to between 5.5 percent and 5.9 percent, from as much as 6.2 percent earlier.
The central bank estimates residential property prices in the third quarter rose the fastest in Manado, a tourist destination for nearby coral reefs on Sulawesi island, with gains of 34 percent. Prices may have jumped 25 percent in Surabaya, the country’s second-largest city, and 15 percent in the capital Jakarta and surrounding satellite cities such as Tangerang and Bekasi, according to Bank Indonesia data.
Property demand is being driven by a growing middle class and increasing affluence. The country’s emerging middle and middle-to-high end consumers may reach 184.5 million by 2020 from 115.8 million in 2012, according to forecasts by the Boston Consulting Group Inc. in a March report.
“Rising purchasing power and positive urban demographic trends are driving continued property demand,” said Michelle Chia, a Kuala Lumpur-based economist at CIMB Investment Bank Bhd. “I don’t think Indonesia is in danger of a property bubble, with demand still outstripping supply, relative to say Hong Kong, Singapore or Malaysia.”
Bank Indonesia has already taken action to try to stem the potential for property bubbles. The central bank cut the maximum loan-to-value ratio for a home buyer’s second house to 60 percent, and for third and subsequent houses to 50 percent from 70 percent previously, effective on Sept. 30. It began requiring lenders to demand minimum down-payments for housing and vehicle loans in June last year.
Singapore’s government has increased efforts to tame property prices that had surged to a record, adopting measures including a cap on debt at 60 percent of a borrower’s income, higher stamp duties on home purchases, and higher real-estate taxes.
These measures may be reducing the allure of buying property in Singapore, a favored destination for Indonesia’s rich to invest or keep their wealth. Indonesians purchased 442 private homes in Singapore in the eight months through August, about half the total for all of last year and a third of the level for 2011, according to data from Singapore’s Urban Redevelopment Authority.
Indonesians have fallen behind the Chinese as the biggest non-permanent resident buyers of residential property in Singapore in 2013, after being in top spot last year, the authority’s data shows. In Indonesia, foreigners are officially only allowed to lease properties.
The number of Indonesians classed as elite by the Boston Consulting Group, based on their level of household spending, is estimated to grow to 6.9 million by 2020, up from 2.5 million in 2012. The country’s population is also among Asia’s most youthful, with more than 26 percent of its people aged less than 15 years, according to U.S. Census Bureau.
The growing demand for prestige city living and the relatively low interest rate environment means the condominium market should see positive growth, Jones Lang LaSalle said in a report in August. Sales are projected to strengthen, led by projects attached to international luxury hotels as more people perceive residential properties as an attractive investment offering good rental income, the company said.
The central bank’s measures may take some of the steam out of high end condominium prices, slowing gains to about 12 to 15 percent next year, from 20 to 40 percent in the last two years, said Artadinata Djangkar, a director of PT Ciputra Property (CTRP), which is developing luxury apartments, offices and a mall in a complex in central Jakarta.
“Rising interest rates, the implementation of the new loan-to-value rule and the weakening rupiah will bring Indonesia’s property market back to normal growth next year,” said Djangkar.
Elsewhere in the Asia-Pacific region, Australia’s consumer prices gained more than economists forecast last quarter, data released today showed. In Europe, the Bank of England will release minutes of the monetary policy committee’s October meeting, while a report on mortgage applications is due in the U.S.
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