Global credit agency Fitch Ratings stated in its latest Indonesia Property Watch report that demand in Indonesia's property sector will not improve in the short-term. Whereas the Indonesian government implemented policies to cool the property market in 2013 (as authorities were concerned about the emergence of a bubble), it has recently shifted its stance and implemented measures to boost the market amid the country's economic slowdown. However, Fitch Ratings does not expect a quick rebound.
About two years ago Indonesia's property market started to cool after the central bank (Bank Indonesia) raised the minimum down payment for property purchases and curbed mortgages for second home ownership. Moreover, Bank Indonesia hiked its benchmark interest rate gradually from 5.75 percent in June 2013 to 7.50 percent in November 2013 in a bid to combat high inflation, curtail the country's current account deficit and support the rupiah (which started to weaken sharply due to monetary tightening in the USA). Besides high inflation (caused by several subsidized fuel price adjustments), slowing economic growth of Southeast Asia's largest economy also curtailed people's purchasing power.
As a result, Indonesia's property market lost momentum as Indonesians started to postpone the purchase of a house, while developers delayed or cancelled the development of new projects. In an attempt to boost the country's property sector Indonesian authorities implemented deregulation measures by relaxing regulations and eliminating uncertainties. Bank Indonesia relaxed the down payment requirement for property purchases by an average of 10 percent in June 2015, followed by the proposal of the Finance Ministry to change the threshold for the imposition of the 20 percent luxury tax to a property value of IDR 10 billion (approx. USD $740,000), from IDR 2 billion previously. Lastly, the Finance Ministry also proposed to allow expats to own property (valued at least IDR 10 billion) in Indonesia.
However, Fitch Ratings emphasizes that - although positive for the attractiveness of the property sector - all these deregulations will require time to spur property demand in Indonesia, particularly as new regulation-making tends to be slow in Indonesia. Not unimportant, Fitch Ratings expects that purchasing power and consumer confidence in Indonesia will remain weak in the near future on persistent economic turmoil.
The credit rating agency added that the country's larger property developers - such as Bumi Serpong Damai (BB-/stable), Lippo Karawaci (BB-/stable) and Pakuwon Jati (BB-/stable) - are in a better position to 'weather the storm' due to their stronger track records and recurring income streams.