New Real Property Down Payment Requirements Resulting in Declining Sales

Here’s a good article from the Jakarta Globe describing the current state affairs with the housing or real property market in Jakarta.  Indonesian banks and mortgage lenders are following new lending guidelines that now require the borrower or home purchaser to put down a 30% minimum down payment (up from the previous prevailing rate of 20%).  The loan to value (LTV) ratio is now 70/30 as opposed to the 80/20 previously.  This obviously means that borrowers will now have to dig even deeper into their savings or wallets to throw down the required 30% down payment. 

Since mortgage loan terms in Indonesia are between 10 -15 years in duration (as opposed to 30 year loans in America) this will mean that with the additional 10% down payment the borrower will have a lower monthly mortgage payment and have the loan amortized (killed off) or paid in full in a slightly shorter time frame; but the additional 10% requirement up to 30% now will also have adverse economic consequences:

• slumping or softening property sales.

• home value appreciation or owner/seller equity being affected by slow or declining home sales or "comps".

• first time home buyers being effectively priced out of the market as much greater cash reserves are now required to obtain mortgage financing.

• a possible higher demand for properties on the secondary or re-sales market.

• the possibility of the rise or prevalence of SAF (Seller Assisted Financing) or the owner/seller of the property holding a second deed of trust on the property.

 

The good side of all this, despite the difficulties of some people coming up with the additional 10% down payment, will result in a favorable buyers’ or investors’ market with owner/seller or developer making all kinds of concessions to get a sales contract to go through and stabilized or even backward sliding home prices.  

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Here now below is the article:

Demand for residential properties in Jakarta is expected to drop in the second half of this year and into early next year after Bank Indonesia increased the minimum amount for a down payment needed to purchase a home.

“More of an impact will be seen in the second half of this year or early next year,” said Arief Rahardjo, head of research at Cushman & Wakefield, a property consultancy firm. “I think the demand will continue to decline, but how bad will it be, we don’t know yet.”

In a media briefing on Thursday, he said that in the first half of the year, demand in Greater Jakarta’s premium residential market — with prices of Rp 400 million ($42,000) and above — saw a decline.

Cushman & Wakefield’s report shows that in the first half this year, the average number of houses sold every month fell 32 percent, to 148.6 units from 180.2 units a year earlier.

In terms of value, there was a 29 percent growth, to Rp 149.8 billion, in the average monthly take up as prices of land and houses continued to increase. The growth in housing demand exceeds supply, indicating a 91.8 percent sales rate in the first half, the report said.

Bank Indonesia on June 15 imposed a 30 percent minimum down payment on bank loans for houses that are larger than 70 square meters. (753.5 sq ft. - the size of a very small studio apartment or condo).

Arief said that since the implementation, some developers have claimed that home transactions declined along with processed applications of home loans.

“Some banks admitted that they see some softening in mortgage applications,” Arief claimed.

He said some banks lowered their mortgage rates to attract more home buyers to apply for mortgages.

Arief said that Bank Mandiri in September offered a fixed interest rate of 6.75 percent for the first two years, from 8.8 percent for the first-year rate it had in March.

Banks like Bank Rakyat Indonesia, CIMB Niaga and Bank Negara Indonesia also had similar rate alterations last month, as compared to March.

“Looking forward, I believe, developers might offers buyers payment schemes to boost sales,” he said, including three- to six-month cash installment plans for the 30 percent down payment for banks.

Transactions of homes purchased at this price range often use home loans, he explained.

In upper-class houses, priced at more than Rp 2 billion, 46 percent of transactions use mortgages.