• Property demand in Indonesia is set to fall to a new low amid concerns among households about their income growth and the economic outlook, an FT Confidential Research survey has found.
• Our survey indicates that central bank attempts to boost the housing market have failed thus far. We do not expect a recovery in mortgage loan growth until 2018 at the earliest.
• Primary market price inflation will continue to slow, though we expect secondary market prices to bear the brunt of demand weakness as developers try to defend their margins.
FT Confidential Research’s latest survey of the Indonesian property market has found demand set to weaken further amid concerns among households about their incomes. This is set to weigh on already weak mortgage loan and property price growth.
Our Property Purchase Index, which gauges households’ purchasing plans for the next six months, dropped to 45 in the fourth quarter, its lowest level since the series began in the third quarter of 2013. This fall was mirrored in our Property Buying Sentiment Index for the country – asking whether it is a good time to purchase a property – which slipped to 43.8 in the fourth quarter, down from a peak of 60.5 at the start of the year (see chart).
Weakening demand for residential property reflects the deterioration in consumer sentiment towards their household income and discretionary spending. Rather than boost spending, Indonesian consumers are opting to save.
The new normal
Our latest readings of the property market also suggest that previous efforts by Bank Indonesia, the central bank, to spur demand by relaxing constraints on loan-to-value ratios have not paid off. The bank raised its cap on the LTV ratio – which sets the maximum level of mortgage available relative to the value of the property – back to 80 per cent from 70 per cent in mid-2015.
Six interest rate cuts over the past year have also failed to stir the household sector. Central bank data show the growth of outstanding mortgage loans ranging between 6.8 and 8.4 per cent since May 2015 vs an average of 19.3 per cent growth in the two previous years (see chart).
We believe this slower growth represents a new normal for Indonesia and expect the average rate of growth in mortgage loans this year to remain in line with that seen in the past 18 months. There is scope for improvement in 2018 on the back of an expected pick-up in Indonesian economic growth.
Secondary market prices to take the hit
Weakening demand will be reflected in slower growth of primary market prices. However, as developers try to protect margins when pricing new launches, secondary market prices will bear the brunt of this weakness. This will be more apparent in previously overheated first and second-tier cities such as Jakarta, Bandung and Bali.
Bank Indonesia estimates its Property Price Index to have risen to 194.4 in the fourth quarter of last year from 193.8 in the third, representing year on year growth of just 2.3 per cent (see chart). Similarly, our Property Price Expectations Index fell to 78.7 in the fourth quarter, its lowest level since the third quarter of 2013.
| FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and Southeast Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors. |
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