Weakening Property Purchasing Power Needs to Be Anticipated

Property credit growth is predicted to be restrained due to the impact of rising interest rates.

KOMPAS/PRIYOMBODO

Workers are building subsidized houses in Cibunar Village, Parung Panjang, Bogor Regency, West Java, on Monday (19/2/2024). This housing scheme with subsidized mortgage loans is intended for low-income communities (MBR) with low interest rates and easy installments.

JAKARTA, KOMPAS — The increase in the reference interest rate to 6.25 percent to strengthen the stability of the rupiah has the potential to encourage an increase in credit interest rates and suppress economic growth, including the sector property. The housing market which is sensitive to credit interest rates has the potential to be affected, triggering a weakening of purchasing power.

Head of Research at Colliers Indonesia, Ferry Salanto, stated that the increase in interest rates set by Bank Indonesia is to strengthen the stability of the rupiah exchange rate against the possibility of worsening global risks, as well as a preventive measure to ensure inflation remains under control. However, an increase in benchmark interest rates is usually followed by an increase in credit interest rates, including home ownership loans (KPR).

The increase in mortgage interest rates causes the cost of borrowing to purchase property to increase, which can reduce consumer purchasing power and slow down demand for property, especially for those who rely on loan financing from banks.

"An increase in mortgage interest rates is likely to happen gradually, but it will definitely have an impact on society. Decreased property purchases could occur, thus hindering property growth," said Ferry when contacted in Jakarta on Thursday (April 25, 2024).

Also read: BI Raises Reference Interest Rate to 6.25 Percent

Ferry predicts that the increase in benchmark interest rates will encourage changes in community behavior, including being more selective in applying for loans or seeking loans with lower credit interest rates. On the other hand, higher interest rates can also affect developers' decisions to start new projects. Higher loan costs can make projects more expensive and potentially hinder the overall growth of the construction and property sectors.

The increase in the benchmark interest rate is not expected to continue. The government needs to remain consistent in maintaining economic growth above 5 percent so that the real sector can continue to grow.

Higher borrowing costs could make projects more expensive and potentially hamper growth in the construction and property sectors.

Similar thoughts were expressed by the Executive Director of Indonesia Property Watch (IPW), Ali Tranghanda. The increase in the benchmark interest rate followed by the increase in credit interest rates will lower the purchasing power of the community. According to IPW's calculations, every 1 percent increase in KPR interest rates will decrease market demand by 4-5 percent. The housing market will be stagnant, especially in the middle to lower segments.

"The decrease in the market is more pronounced in the lower middle price segment below Rp 1 billion," said Ali when contacted separately.

According to Ali, uncertainty in global conditions and world geopolitics also needs to be anticipated because they can weaken the economy and trigger inflation, including inflation of building materials. Incentive policies are needed, as well as government efforts to maintain economic growth.

KOMPAS/PRIYOMBODO

The activities of residents inhabiting subsidized housing in Cibunar Village, Parung Panjang, Bogor Regency, West Java, on Monday (19/2/2024). PT Bank Tabungan Negara (Tbk) has distributed subsidized housing loans (KPR Bersubsidi) to over 4 million households who are unable to own a house.

Sensitive

The General Chairman of the Central Leadership Council of the Indonesian Real Estate Developers Association (REI), Joko Suranto, revealed that mortgage funding is one of the strategic elements for the property industry. The property industry is sensitive to increases in loan interest rates.

The authorities hope that the increase in Bank Indonesia's benchmark interest rate will not immediately trigger an increase in mortgage interest rates for the next few months. The banking sector is considered to have an interest in maintaining property credit. This year's growth in the property industry is targeted to increase by 12 percent market capitalization.

The property industry is sensitive to increases in credit interest rates.

He added that the property industry must continue to be encouraged, especially in providing housing for the public. Moreover, the upcoming government has targeted a program to build 3 million houses, including the development of 1 million houses in rural areas, 1 million houses in coastal areas, and 1 million houses in urban areas.

"The increase in credit interest rates must consider the economy and the condition of the society who are consumers. Banks have an interest in maintaining market penetration with affordable credit interest rates," said Joko.

Also read: Millennials Still Have Difficulty Buying Homes

On the other hand, Joko continued, developers are also taking steps to anticipate the impact of the rise of mortgage interest rates on the housing market. Among them, providing interest subsidies to consumers for the first year of their mortgage so that the realization of purchasing a home is not hindered and the installments become lighter. This method is considered a common practice for developers to stimulate the market.

"Banks are also expected to carry out similar gimmicks in financing schemes to accommodate new consumers or hold back mortgage increases," said Joko.