Interview: Harun Hajadi
How will the recently imposed rule on down payment obligations affect the growth of the real estate sector in the short term?
HARUN HAJADI: The 70% loan-to-value (LTV) ratio required by Bank Indonesia will have an overall impact on the sector, but it will mostly affect first-home buyers, as they are the main users of financial instruments for purchasing property. If the ultimate intent of Bank Indonesia is to slow down a potential overheating of the property market, this may not be the most effective way to do it. Investors and speculators normally pay in cash or by instalments through property developers rather than with mortgages, meaning they are almost unaffected by this policy. Moreover, end-users and first-home buyers will buy and occupy the property and will make sure they can fulfil their mortgage obligations.
The Indonesian market is different from that of the US or Europe, where buyers can acquire several properties under the same name and loans can be easily provided without a proper evaluation of the client. Bank Indonesia should look at the big picture and see that the proportion of mortgages in the portfolio of the banks is actually very small. They are trying to maintain a healthy banking sector, which is fine, but there are other ways to achieve it. Bank Indonesia should consider applying a discriminatory policy for first-home buyers with a more flexible LTV ratio and apply the 30% down payment to second- or third-home buyers. This regulation is still open to further changes, and a line of discussion has been created between Bank Indonesia and developers. There is an agreement to review the regulation every three months, so we are positive that further amendments will be made and a favourable agreement for all stakeholders will be reached.
What are the reasons behind the Indonesian real estate sector’s relatively low contribution to GDP?
HARUN: The real estate sector’s low contribution to GDP is connected with the bursting of the real estate bubble in 1998. This was compounded by the collapse of the local currency. Many developers were caught off-guard and highly indebted. That is when the regulation from Bank Indonesia that banned borrowing for land acquisition was put in place. This regulation still exists today, and I believe this is good, as it does not allow developers to speculate with the land they purchase. When they buy land, they develop it, which protects the sector from further bubbles.
Moreover, Indonesian banks are especially conservative after the above-mentioned crisis. They are very selective and only 60-80% of the mortgage applicants are granted with a loan. The availability of mortgages in the country has been historically short simply because Indonesia lacked long-term funding. Funding often comes from deposits and consumer savings funds, but not from other long-term sources. If you get a mortgage in Indonesia, you will get a fixed interest rate for the first two years, but after that period the rate becomes variable. So under this model, Indonesians do not yet have the security that they would have with a long-term funding scheme. These are probably the main reasons for the sector’s still low contribution to GDP.
How would a relaxation of the laws limiting foreign ownership foster investment in the sector?
HARUN: We are currently discussing the potential effects of relaxing the foreign ownership land laws. If the land agency is not involved in the conceptualisation of this new law, nothing will come out, just as has happened with the latest attempts to pass the bill. I know the government will say that the ownership of property by foreigners will increase the value of property and as a result local buyers will not be able to buy property – as has happened in Singapore. However, in my opinion an extensive assessment of the potential impact of relaxing foreign ownership laws must be made, rather than basing decisions on speculations. We need data and statistics as well as comparisons with other countries. Then we will be able to determine whether relaxing the laws will have a real impact to local citizens.
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