In Indonesia, New Mortgage Rules Aim to Cool Market

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Bank Indonesia hopes to cool a skyrocketing property market with new mortgage regulations scheduled to take effect new week.

The central bank is implementing new minimum down payment rules for second properties. The loan-to-value ratio for the purchase of a second property will be reduced to 60 percent and 50 percent for purchases beyond the second property. This means buyers must pay a down payment of 40 percent for a second property and 50 percent for additional homes. 

Customers will also be required to declare their previous mortgages when applying for new loans. 

The measures come a year after the bank implemented mortgage regulations requiring a 30 percent deposit on mortgages, which it hoped would slow the market. But Indonesia has remained one of the fastest appreciating markets in the world.

"We expected that the mortgage growth rate would decelerate when we implemented a similar regulation last year," Bank Indonesia communications department director Peter Jacobs told reporters. "However, as it turned out the rate remained high,"

Mortgage rates for houses measuring more than 70 square meters increased by 25.5 percent in July compared to the prior year, while apartments measuring 21 square meters increased by 85.6 percent year-on-year, according to data from the bank.

The mortgage rates surpass the aggregate credit growth rate, which was approximately 20 to 25 percent, Mr. Jacobs said. 

"We predict that if excessive growth continues, it will lead to the concentration of bank lending to the property sector and trigger boom and bust in the sector," he said.

Similar cool measuring have been implemented in other fast growing property markets. New rules in Beijing stated single adults could only buy one home while down payments increased for second homes. However, the measures haven't deterred prices from continuing to increase. 

On the other hand, new measures in Hong Kong contributed to a 60 percent decrease in sales last May.

Following the announcement from Bank Indonesia, Fitch Ratings issued a statement reaffirming its confidence in the market's future. 

"We believe the market will remain attractive despite slower growth in property prices, and developers will be able to weather the more challenging operating environment," Fitch Ratings said in the statement. 

The new rules taking effect on September 30 should allow property prices to appreciate more slowly, the firm said. Jakarta's home prices grew by 27.2 percent year-over-year during the second quarter, leading global home price gains, according to a report from Knight Frank.

"Our data shows that the amount of people owning more than one property has been increasing since 2010, when the figure was 4,700. It grew to 6,500 in 2011 and to 8,300 a year later," Mr. Jacobs told The Jakarta Post. "As of April, outstanding multiple mortgage loans stood at Rp 31.8 trillion [US$2.75 billion]."

How the new measures affect Indonesia's property market is left to be seen. Fitch Ratings says although the lower loan-to-value caps will temper growth, property prices will be impacted more by delayed purchases amid general economic uncertainty.