Govt to set up secondary mortgage market

Govt to set up secondary mortgage market

JAKARTA (JP): The government is considering setting up a
secondary mortgage market in the near future to provide another
source of funds for developers.

"The Ministry of Finance has established a working team to
sound out the possibility of using secondary mortgages as a
source of funds for housing development," State Minister of
Public Housing Akbar Tandjung told the press after a hearing with
Commission V of the House of Representatives here yesterday.

He noted that basically the team has agreed on the mortgage
establishment. "They are working on operational guidelines to be
applied. The market will probably be set up," he said.

The secondary mortgage will function as the market for
mortgage debentures which are treated like securities. It is a
service primarily intended to take over the long-term housing
loans provided by financial institutions to house buyers and
trade them on the market.

Such a service, which is already available in other ASEAN
countries like Malaysia and Singapore, can improve the lenders'
cash flow considerably. They can recoop their money before the
loan maturity date and be able to finance other housing
developments faster.

Besides Indonesia, Malaysia and Singapore, the Association of
Southeast Asian Nations (ASEAN) also includes Brunei, the
Philippines, Thailand and Vietnam.

But property analyst Panangian Simanungkalit feared that such
a service would hamper the government's efforts to develop low-
cost houses to meet the increasing demand from those with incomes
of below Rp 900,000 (US$389).

The government has prioritized the development of low-cost
housing in the current Five Year Development Plan period ending
in 1999.

To realize its target of developing 600,000 low-cost houses
during the period, the government requires developers to build
six low-cost houses for every three modest houses and every
luxury house they build.

"As matters stand, the establishment of the secondary market
is not urgent yet," Simanungkalit told The Jakarta Post
yesterday.

"If the government sets up a secondary mortgage, the market
mechanism will apply. Investors in the market will only buy the
debentures if they are promised higher profits," he said,
pointing out that money will always gravitate to where it can
earn most.

He added that debentures of low-cost houses might not be
traded on the market, as they promise only a small profit margin.

Main obstacle

"The secondary market will only benefit developers as it could
provide them with cheaper money from, for example, pension funds
and insurance companies," he said.

He pointed out that it could further worsen the current
problem of rapidly rising land prices, which remain the main
obstacle to the building of cheap housing.

As developers can regain their fund sooner they can also
enlarge their land ownership more quickly.

He said that if the government wants to facilitate the
development of low-cost houses, it should address problems
arising up-stream, specifically the rapidly increasing price of
both developed and undeveloped land.

"The main problem up-stream is that conglomerates own almost
80,000 hectares of developed land ready for building, or almost
80 percent of the total developed land in Jabotabek," he said.

The big developers have the capacity of building only 120,000
units per year, which only require some 2,000 hectares of land.
Their ownership of 80,000 hectares is, therefore, equivalent to
their needs for 40 years.

As they buy the land with bank credits, they have to pay
interest on the loans. Costs will mount until they build the
houses and sell them. "The developers charge these costs to house
buyers," Simanungkalit said.

"This is the problem that should be addressed by the
government. The government, I think, should design an appropriate
regulation to control the prices of the land," he noted.

He said that the secondary mortgage market could expand land
ownership for the developers and further contribute to land price
increases.

But he said that if the government wants to address the
housing problem in the down-stream, it should be providing
cheaper credits for the development of low-cost houses, or
subsidize house prices. (13)