‘Indonesia housing subsidies hamper market growth’

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Houses and apartments sprawl across Thamrin in Central Jakarta. Because of overpriced housing in the downtown area, millions of middle class people are forced to live in the suburbs or rent a house or apartment close to their workplaces.

The Indonesian government’s housing subsidy programme designed to resolve the country’s mounting backlog might backfire by hampering property industry growth and leading to the construction of lower quality homes, the World Bank has warned.

World Bank housing specialist Dao Harrison warned on June 25 that the government’s ongoing housing mortgage (KPR) subsidy programmes such as the Housing Financing Liquidity Facility (FLPP) and interest rate subsidies for loan instalments (SSB), which are reserved for landed houses at around 160 million rupiah ($11,000), slowed lending growth and discouraged developers from building high-quality homes.

“Our survey shows that KPR consumers aspire to purchase houses at a far higher price at 300 million rupiah,” Harrison said during an online presentation of the World Bank’s latest report published on June 22.

“Developers could build better homes worth an additional 140 million rupiah on top of the maximum KPR property price and lenders could provide more lending to homeowners, but they don’t.”

In addition, the KPR property price cap has also led to developers building houses that are located outside of metro areas to bring down prices. World Bank data show that 57 per cent of FLPP-subsidised housing units were located in rural areas in 2017, a huge increase from 36 per cent in 2016.

Hence, the housing market’s share of national gross domestic product (GDP) has stagnated at three per cent for the last five years, falling behind neighbouring countries such as the Philippines and Cambodia, where the housing market’s share of GDP is above four per cent, said Harrison.

The government has been struggling to reduce the country’s housing backlog, which stood at 7.6 million in 2015.

President Joko “Jokowi” Widodo’s administration aims to build 1.25 million houses this year to fulfil its commitment to build one million houses per year, partially aided by the mortgage subsidy programme.

Since 2015, the beginning of Jokowi’s tenure, around 4.8 million houses have been constructed, and his administration plans to build an additional 3.9 million houses by 2024.

In April, the government rolled out new housing loan subsidies amid the Covid-19 pandemic for 175,000 low-income families nationwide and increased the salary ceiling for eligible recipients to eight million rupiah for all types of housing from the previous four million rupiah for landed houses and seven million rupiah for low-cost apartments.

It has also launched a public housing savings programme (Tapera), which requires employers and workers to contribute to a mortgage loan scheme similar to universal healthcare insurance.

However, the World Bank warned, the lower-than market interest rate made possible by the subsidy has also made it impossible for private lenders to compete in the housing market.

The mortgage subsidy allows eligible low-income households to pay mortgage interest rates of five per cent for a 20-year tenure, far lower than private banks interest rates of around seven to nine per cent for the first three to five years, the World Bank highlighted.

Harrison said: “The subsidy programme is designed to distort the housing market, as lenders cannot compete against the FLPP and SSB schemes.”

The Washington-based development lender also warned that the SSB loan programme mechanism created 7.5 trillion rupiah in future liability per year from interest gap payments for 140,000 homes. Between 2015 and 2018, the government accumulated 30 trillion rupiah in future liabilities, the World Bank estimates.

Responding to the report, the Ministry of Public Works and Housing’s financing strategy director Herry Trisaputra Zuna stated that the housing market still required the government’s intervention in the form of subsidies.

“The housing market is not ideal, so we cannot rely solely on the market and need to make some interventions,” he said during the same webinar.

Herry said the World Bank’s recommendation could also not address the government’s main issue with the country’s housing programme, which was lack of funding.

“Our problem is we have limited money now, and that’s why we have to modify instalments for the mortgage-linked down payment assistance [BP2BT] programme,” he said.

Real Estate Indonesia (REI) also stated in April that the sector relied heavily on subsidised housing programmes, which account for half of the industry’s revenue, data from association members show.

THE JAKARTA POST/ASIA NEWS NETWORK