Real Property (Real Estate) Financing in Indonesia

Here's an interesting news article below appearing in Bloomberg's Business Week concerning real estate mortgage financing in Indonesia.  

Unlike in the USA, Indonesia does not have any type of government insured "FHA" or "first time home buyer" mortgage loans which require minimum down payments of  between 3 - 5 %; or Loan to Value (LTV) ratios of 95 - 97% of the appraised value of the home.  Additionally, the prevailing real estate mortgage financing interest rate in Indonesia is somewhere between 10-13% (unlike ~ 3.5% in the USA right now for a 30 year fixed rate mortgage).  Furthermore, the maximum mortgage financing term in Indonesia is 15 years, sometimes 20 years.

Now to exacerbate the situation or make matters worse, a new Indonesia's Central Bank rule which is set to go into effect on June 15, 2012 will increase the minimum down payment requirement from 20 to 30% ! 

What does this all mean?  In short, for a prospective home buyer in Indonesia there is good news, and bad news (mostly bad however):

• the bad news:  they will have to come up with an even larger down payment now, pay relatively higher interest rates than in the USA, and finance it for a shorter term.  This all equates to a higher monthly (or yearly) payment which effectively prices many (or most) Indonesians out of the market. Also with such a substantial down payment "parked" into only one [under performing] asset; a home owner, prospector or investor in Indonesia cannot diversify their investment portfolio by freeing up some of their capital reserves or savings to invest in other lucrative business or financial markets.

• the good news:  those who are able to make the 30% down payment and buy will have the property paid off quicker than their USA mortgagor counterparts.

Global Property Guide sums it up pretty well:

The relatively poor price performance of residential real estate in Indonesia has been something of a puzzle.  There is tremendous pent-up housing demand. Indonesia has the world’s fourth largest population of 245 million people. Despite strong economic growth and high levels of investment, some of the major factors that have hampered the growth of Indonesia’s housing market are:

• High mortgage interest rates
• Foreign ownership restrictions
• High costs of building materials
• High tax rates
• Red tape in government

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http://www.businessweek.com/news/2012-06-07/indonesia-to-push-through-down-payment-rules-amid-protest

Indonesia’s Central Bank will push aside calls to delay rules requiring down payments for new home and vehicle loans, seeking to avoid a property bubble and minimize credit risks.

The new rules will be effective June 15 as planned, Bank Indonesia Deputy Governor Muliaman Hadad said yesterday. The minimum down payment will be 30 percent for mortgages and four- wheeled vehicle loans, 25 percent for motorcycles and 20 percent for commercial vehicles, Bank Indonesia said in March. Businesses had asked for a delay to avoid a decline in sales.

“So far we have no plan to postpone the implementation of the rule,” Hadad said via mobile-phone text message in response to questions. “The rule won’t affect purchasing power, it will just make people postpone vehicle or house purchases. We see demand for vehicles and houses remaining strong this year.” 

Bank Indonesia has sought to sustain economic growth and contain inflation without raising its benchmark interest rate, which has been steady since a cut in February. Indonesia took steps to reduce excess funds in the economy last month, raising the rates on central bank bills and term deposits to absorb liquidity. 

“Bank Indonesia’s new tighter lending regulations will help protect the financial system and safeguard growth against any potential negative shocks,” said Fred Gibson, an associate economist at Moody’s Analytics in Sydney. “Policy makers have become increasingly wary of frivolous lending leading to overleveraged households and property bubbles that could trigger a domestic banking crisis.”

Business Concern

The bank expects the economy to expand 6.3 percent to 6.7 percent this year. Inflation in Southeast Asia’s biggest economy was 4.45 percent in May, slowing for the first time in three months.

Businesses from finance companies to property developers and vehicle retailers say the rules will hurt sales this year. 

“National mortgage sales may miss a target of 300,000 units this year after Bank Indonesia implements the rule,” Setyo Maharso, chairman of the Indonesian Real Estate Association, said in a phone interview on June 6. The group sent a letter to the central bank seeking a delay, he said.

Indonesian mortgage sales rose 15 percent in 2011 and the association had forecast growth of 15 percent to 18 percent this year before the new rules were unveiled, Maharso said. 

Wiwie Kurnia, chairman of the Indonesian association of financial services companies, said last month that the rule meant financing could fall 30 percent to 50 percent this year. “To minimize this impact it’s better if the government implements this rule gradually,” he said.