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Indonesia real estate: housing bubble or playing catch-up?

Written by Ashley Boncimino

After years of growth and rising property values in Indonesia’s real estate market, experts are predicting a slowed growth for 2014. Action from the country’s central bank may have prevented a housing bubble, according to Oxford Business Group.

For the past several years, property prices have increased between 15% to 17% per year, according to housing developers association Indonesian Real Estate head, Eddy Hussy. He cites recently implemented government regulations aimed at slowing the growth of housing credit, which expanded rapidly during the first half of 2013, according to Oxford Business Group.

“The tightening of the market came as some analysts were worried a real estate bubble was forming, although Indonesia’s property prices are comparatively inexpensive by regional standards, even after a period of sustained increases,” the global publishing and consultancy company wrote.

While growth may not reverse its current trend, it may slow significantly, according to Colliers International coverage of comments from housing developers association Indonesian Real Estate head Eddy Hussy.

Rates, which have hovered between 15% and 17% annually in recent years, should slow to around 10%, according to Hussy.

Credit rating agency Fitch Ratings also predicts strong but slowed growth for the country’s real estate market in the next 12 months, citing effects of the central bank’s move to raise its benchmark interest rate by 50 basis points to 7%. The move intensifies pressure on the country’s mortgage market and thus could dampen demand.

“Fitch expects rated property developers to weather a more challenging operating environment in the next 12 months with sufficient liquidity buffers and a well-distributed debt maturity profile,” wrote Fitch Ratings in its Indonesian Residential Property report. “Nevertheless, long-term prospects remain attractive due to Indonesia’s growing middle income, high urbanization, and still low mortgage rates,” the company said in a press release.

Predictions for slowed growth are already on the road to vindication, noted the Financial Times. “And now, with the central bank having hiked interest rates to the highest level in four years and the economic growth having slowed to the lowest level in four years, the property market is starting to cool,” according to the paper.

Still, slowed growth may also be a partial result of property values recovering from the devastation of the 1997-1998 Asian crisis, which cut property values to regional lows. Properties in Jakarta, for example, are moderate compared to capital cities in other Asian countries.

After its peak in late March 2013, the property and real estate index in the Indonesian Stock Exchange (ISE) fell sharply at the end of 2013. Though the index rose for the first three months of 2014, it has not yet reached its peak from over a year ago, and has been on the decline for the past two weeks. The index contains all the listed property and real estate companies on the ISE.

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–Edited by Mohamed P.Hassan

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