Analyst warns possible property crash in Indonesia

JAKARTA (JP): A serious property crash may hit Indonesia in the year 2003 if the government fails to take effective preventive measures, a property analyst warned here over the weekend.

The chairman of the Center for Indonesia Property Studies (CIPS), Panangian Simanungkalit, said that without an appropriate policy, the property sector crash might occur much earlier than 2003.

"The property market has already shown indications which could lead to a crash, such as the fall in prices due to a market slump," he told The Jakarta Post.

But he said the main indication was the growing trend in nonperforming loans in the sector.

These increased from Rp 2.7 trillion in 1994 to Rp 3.9 trillion in 1995 and to Rp 5.25 trillion (US$1.18 billion) in 1996.

"We estimate that the problem loans will reach Rp 5.60 trillion this year," he said.

Panangian said that banks' credits to the property sector had grown more quickly than the growth of overall lending in the last three years.

Property credits grew 52.9 percent in 1994, 29.1 percent in 1995 and 37.4 percent in 1996, much higher that the growth of total bank credit of 25.7 percent in 1994, 24.2 percent in 1995 and 23.7 percent in 1996.

Last year, banks' property credits accounted for 18.8 percent of the total Rp 313.3 trillion. This year it is projected to reach 19.4 percent.

He said the rise in credit to the property sector was not because developers built more properties but because they borrowed in order to pay back their loans.

He said the stagnation of property prices in a number of Jakarta's suburbs and a price cut in other locations was another pointer.

"This indicates a weakening demand and an oversupply in the property market," he said, adding that house prices usually increased by between 15 percent and 25 percent every year, while land prices rose by between 20 percent and 40 percent," he said.

Panangian was commenting on a statement issued by property developers last week that Indonesia would not experience a property crash as long as its annual economic growth was maintained at seven percent and there were no overinvestments.

But Panangian said continued high economic growth could act as a temptation for developers to raise their property investments that could in turn cause an oversupply and further weaken demand.

Declining interest rates could also encourage investors to borrow more money for property projects, he said.

Panangian estimated that based on the current economic indicators such interest rates downward trend, the property sector would boom between 1999 and 2001.

"But after that it will be sluggish. This unfavorable situation will peak in the year 2003." he said of the possible time of the property crash.

He said that to avoid the problem, Bank Indonesia, the central bank, should not only pursue a moral suasion policy in its effort to limit the credits to the property sector.

It should also require all banks to carefully audit all property projects and make sure that no banks violated the legal lending limit regulation.

"Banks should learn from the defunct Bank Summa, which went bankrupt due to its overinvestments in the property sector," he said. (bnt)