BI Rate Hikes Aggressively, Indonesia's Property Time Bomb Starts Ticking

Jakarta, CNBC Indonesia - In the current era of high interest rates, one of the most impacted sectors is property. Bank Indonesia has aggressively raised interest rates. Since 18 May 2026, it has increased the benchmark interest rate by 100 bps from 4.75% to 5.75%. Historically, Bank Indonesia’s aggressive monetary tightening cycle from 2022 to 2023 demonstrated a significant dampening effect on property credit disbursement dynamics. When the benchmark rate was held at 6% at the end of 2023, the growth rate of mortgage (KPR) and apartment ownership credit (KPA) still managed to record an expansion of 12.1% year-on-year (yoy) with a total value reaching Rp692.2 trillion. This performance ultimately supported overall property credit, which still grew positively by 7.6% (yoy) to Rp1,303.7 trillion in the December 2023 period. However, the accumulated burden of high interest rates eventually began to erode the real purchasing power of the public in the subsequent period. Entering the end of 2024, the transmission of the floating credit interest rate burden began to pressure the financial resilience of banking consumers. Aggregate total property credit disbursement growth decelerated to 6.5% (yoy) with a value of Rp1,412.3 trillion in December 2024. This slowdown was in line with the downward trend in retail mortgage and KPA credit growth, which slumped to 10.0% (yoy). At the same time, construction credit activity was nearly stagnant, recording a growth rate of only 0.01% (yoy) valued at Rp393.1 trillion. This situation confirmed the caution of developers in expanding amidst stalled market absorption due to the benchmark rate remaining at a restrictive level. A drastic structural dynamic shift was recorded in 2025 as monetary policy easing progressed, pushing the benchmark rate down to 4.75% by the end of that year. Responding to lower funding costs, the total property credit disbursement growth rate surged to 13.0% (yoy) with a value reaching Rp1,597.7 trillion in December 2025. This aggregate growth figure indicated an anomalous movement. The credit expansion did not stem from a recovery in retail purchasing power but was instead supported by a drastic surge in construction credit, which soared 28.2% (yoy) to Rp504.0 trillion. Conversely, mortgage and KPA credit growth actually continued to decelerate sustainably to 6.8% (yoy) in the same period. The gap between supply and demand reached its peak approaching mid-2026. Based on banking data as of April 2026, total property credit was recorded to have grown impressively by 17.5% (yoy) to a value of Rp1,684.9 trillion. This figure was again absolutely dominated by a debt explosion in the construction credit segment, which skyrocketed to 46.0% (yoy) valued at Rp569.4 trillion. In contrast, retail market absorption weakened further, with mortgage and KPA disbursement growth remaining at only 4.8% (yoy) with a value of Rp845.1 trillion. With the BI Rate raised again by 100 bps within one month to 5.75% as of June 2026, property issuers are exposed to very high risk. The massive-scale construction debt expansion previously drawn will be immediately burdened with much more expensive interest costs due to banking rate adjustments. In parallel, the public, which has already shown a weakening trend in mortgage absorption since 2024, will further lose financing capacity due to the rising mortgage rate ceiling. The condition of potentially massive housing unit supply amidst increasingly weakening market absorption triggers the risk of oversupply and liquidity pressure on the balance sheets of the national housing sector as a whole. A decline in profits is also expected to begin being felt in banking statistical data approximately one year after the rate hike. Given the very rapid rate increase, property credit interest and similar products are expected to rise faster than in previous times. This rate hike serves as an important catalyst for the property industry, where nearly half of Indonesia’s property issuers were still experiencing a downward performance trend in their 2024 fiscal year reports compared to 2025, even though they were already in an era of looser interest rates.