Calculating the Impact of the Relaxation of Mortgage Rules

KOMPAS/PRIYOMBODO

Rows of houses built with KPR facilities in Gunung Sindur, Bogor Regency, West Java, Wednesday (12/09/2018).

On Sept. 19, in addition to lowering the benchmark interest rate by 25 basis points or 0.25 percent to 5.25 percent, Bank Indonesia (BI) also relaxed its rules on housing loans or mortgage loans.

The central bank lowered the ratio of loans to value (LTV) or financing to value (FTV) for property and motorcycles. How far can this measure boost sales and help revive the national economy?

Previously, BI lowered the benchmark interest rate (BI 7 Day Reverse Repo Rate) by 25 basis points (bps) in July from 6 percent — which has stayed in that level since mid-November 2018 — to 5.75 percent.

Then, the benchmark interest rate was lowered again by 25 bps from 5.75 percent to 5.50 percent in August. The interest rates of deposit facilities and lending facilities were cut 25 bps to 4.50 percent and 6.00 percent, respectively.

The deposit facility is given to banks with excess liquidity to place their funds at Bank Indonesia, while a lending facility is for banks experiencing liquidity problems and is allowed to sell Bank Indonesia Certificates (SBI), Bank Indonesia deposit certificates (SDBI) or government debt papers (SBN) to the central bank.

Both policies aim to maintain macro and financial stability and boost the domestic economy.

Meanwhile, the LTV/FTV or down payments for (i) housing is 5 percent, (ii) the down payment for motor vehicles is 5-10 percent and (iii) the additional reduction in LTV FTV ratio for property credit or financing and down payment for environmentally friendly motor vehicles is 5 percent each.

The new rules will be effective on Dec. 2. LTV is the ratio of credit to the value or assets (houses or vehicles to be bought) provided by conventional and Islamic banks, while the FTV is the ratio of financing to assets provided by multifinance companies. With the relaxation of the LTV/FTV, down payments will be lower.

Let\'s look at how property loans can be distributed. According to the Indonesian Financial Economy Statistics published by BI, bank loans to the property sector increased by 15.86 percent from Rp 868.82 trillion (US$61.69 billion) as of July 2018 to Rp 1 quadrillion as of July.

The latter included construction loans, real estate loans and housing loans (KPR) plus apartment ownership loans (KPA). Construction loans jumped 25.61 percent from Rp 280.81 trillion to Rp 352.73 trillion, which accounted for 35.04 percent of the total property loans.

The growth of construction loans fell from 30.21 percent in the previous month, while real estate credit only rose 7.89 percent from Rp 149.50 trillion to Rp 161.30 trillion, with a contribution of 16.02 percent to the total property loans. The growth sharply fell from 22.43 percent in the previous month.

Unfortunately, housing and apartment loans only rose by 12.34 percent from Rp 438.51 trillion to Rp 492.61 trillion (with a contribution of 43.56 percent). The growth slowed compared to 13.54 percent in the previous month. In summary, the total property credit growth of 15.86 percent in July was down from 19.59 percent in the previous month. Therefore, BI should loosen the LTV/FTV.

Key factors

What are the key factors to ensure that the 75 bps reduction of the benchmark interest rate over the past three months and easing of LTV/FTV property and motor vehicle loans (KKB) will help revive the national economy?

First, of course, inflation must be kept under control as it is now, or 3.49 percent as of the end of August. The annual inflation experienced a slight increase to 3.32 percent in July, 3.28 percent in June and 3.32 percent in May but remained within the inflation target of 3.5 percent plus-minus 1 percent.

Secondly, the rupiah’s exchange rate against the US dollar must also be stable to ensure a certainty to business players. Don\'t forget, the decline in benchmark interest can result in the withdrawal of foreign funds from the financial market (capital flight) as foreign investors will look for higher returns. The outflow of hot funds can affect the supply of US dollars and weaken the rupiah exchange rate (depreciation).

However, BI projects the rupiah exchange rate to remain stable in accordance with the well maintained market mechanism. This estimate is supported by the prospects of foreign capital inflows and the positive impact of eased monetary policies in developed countries.

Is Indonesia\'s benchmark interest rate still attractive enough in the eyes of global investors? In some other ASEAN member countries such as Vietnam, the interest rate is 6.25 percent, the Philippines 4.25 percent, Malaysia 3 percent, Singapore 1.74 percent and Thailand 1.5 percent.

Meanwhile, benchmark interest rates in some BRICS countries: Brazil 5.50 percent, Russia 7 percent, India 5.4 percent, China 4.25 percent and South Africa 6.5 percent.

It turns out that Indonesia\'s benchmark interest rates are still quite attractive compared to those of other countries. Moreover, several European countries (Germany, France, Italy, Spain, the Netherlands, Belgium and Austria) have zero percent interest rates. In fact, Japan\'s benchmark interest rate is minus 0.10 percent.

Third, the government or regulator must be able to control housing prices so that they are not too high (overpriced). Whose job is that? The government, in this case, the Public Works and Public Housing Ministry, BI or the Financial Services Authority (OJK)? The three institutions, supported by the association of property developers, can work together to control house prices. Please note that higher house prices, rising demand and high property speculation were the main factors that triggered the emergence of a property bubble in 2012.

Surely the increase in home demand will rise in line with the downward trend in lending rates driven by a decline in the benchmark interest rate of the central bank over the past three months. Unfortunately, the country’s supply of homes is not enough to meet the increase in demand due to low growth in house backlogs on the market.

According to data from the Public Works and Housing Ministry, the house backlog reached 7.6 million units as of March 8.

Fourth, why will the new LTV/FTV regulation take effect on Dec. 2? I think the central bank is well aware that the impact of the lowered benchmark interest on lending rates will be felt after three months. Why? Because, of course, banks must recalculate its impact on the cost of funds on their deposit.

With these predictions, it makes sense if the easing of the LTV/FTV regulation will take effect in early December. However, given that the benchmark interest rate has already declined three times, it is likely that the impact will be seen sooner. This means that lending rates will consequently decline after banks lower their deposit rates.

Protecting consumers

Fifth, there has been an increase in media reports about fraudulent developers who not fulfill their promise to build houses, even though the consumers have already made a down payment, or the developer run off with billions of rupiah in down payments in their hands.

Therefore, it is urgent and important to issue ratings for property developers.

Sooner or later, the rating must be issued protect the interests of consumers, so they do not become victims of errant developers. This will improve the quality of the developer, while eliminating rogue property developers.

Which authority is responsible for it? The Public Works and Housing Ministry can do this by cooperating with the developers associations. The rating is needed to reduce fraud in the property sector. Sooner or later, the rating must be issued protect the interests of consumers, so they do not become victims of errant developers. This will improve the quality of the developer, while eliminating rogue property developers.

Sixth, the loosening LTV/FTV regulations means that down payments are cheaper, which will result in higher monthly installments. For this reason, potential customers should really understand the formula. That is, it will better for them to buy a house with a higher down payment so that the monthly installments will be lower.

As a saving tip, consumers should choose a house built under a transit oriented development (TOD) program. This means the housing construction is integrated with transportation development such as railroad tracks, the LRT and MRT. The result, consumers are not burdened with transportation costs to work.

Seventh, consumers should choose developers who have established cooperation agreements with banks focusing on providing mortgage loans. This cooperation can produce mortgage rates that are more competitive than mortgages without cooperation.

PERSONAL ARCHIVE

Paul Sutaryono

Eighth, along with the prospect of an increase in mortgages, banks are also required to endlessly control the ratio of non-performing loans (NPLs), which declined from 2.67 percent as of June 2018 to 2.50 percent as of June 2019, far below the 5 percent threshold.

When such various key factors are implemented, the policy mix of easing LTV/FTV regulations and reducing the benchmark rate can stimulate the property sector. This is expected to drive economic growth. It is not a dream.

Paul Sutaryono, Expert Staff of BUMN Study Center; Banking Observer; Former BNI Assistant Vice President