To help keep the engine of the economy rolling, the central bank cut the benchmark interest rate (BI Rate) down to 8.75 percent earlier this month. The move received a warm welcome from industry players including property companies with hopes that the cut would help improve buyer confidence, thus leading to increasing sales.
Lower interest rates would also help ease developer’s burdens in securing development capital, of which a big part is, in most cases, sourced from bank.
However, it seems that such conditions are not going to materialize any time soon, at least over the next three months. Banks are still reluctant to lower their interest rates.
A cautious approach toward the economy to minimize the impact from ongoing uncertainties in the global financial market has became one of the main reasons why banks are slow to cut their interest rates to consumers.
Currently, the effective loan interest rate for housing (KPR) and apartments (KPA) stands between 14 and 16 percent per annum. Compared to 2-3 years ago, this is much higher and is increasingly becoming a burden to both existing consumers as well as new loan applicants.
On the other hand, tight liquidity in the banking sector has made loan allocation processes to both retail and corporate costumers slower and more difficult.
As the result, sales in the last few months, especially in the housing and condominium market, fell to a minimum level.
The same trend is also seen on the development side.
In the last three months, there have been almost no new projects launched onto the market as developers have began to shift their focus to existing and ongoing projects to achieve target sales rates, and at the same time, to try to meet existing construction schedules.
Therefore, how far could we expect the interest rate to decline further this year?
And if it is successfully brought down to a relatively low level (i.e. the same as in 2004), what is the likely impact on the growth of the property market going onward?
In its recent press releases, the central bank signaled that there is still room for further interest rate cuts as pressure from inflation slowly evaporates - thanks to cuts in fuel prices over the last two months.
Some analysts predict the BI rate may drop further to 8 percent on the basis that inflation can be brought down to between 5 and 7 percent by the end of the year.
As the government continues to urge industry players to adjust prices of goods and services to align with the downward trend on fuel prices (and interest rates), many think that this new inflation target is reasonably fair.
As such, the projection that the BI rate would decline further to around 8 percent may also be feasible - a few research houses even forecast the BI rate may dip to around 7.0 to 7.5 percent this year.
This scenario is interestingly similar to the period in 2004 which also took place during an election year (see above chart).
In 2004, when the country conducted the first direct presidential election in Indonesian history, many people doubted that the property market could grow at a positive level during that period.
But surprisingly, the market performed significantly well on the back of a peaceful and smooth election process and a record low interest rate environment (the benchmark interest rate in 2004 was brought down to 7.3 percent by mid-2004 and continued to hover around that level until early 2005).
In the condominium market for instance, 2004 was considered the peak year for new launches with more than 22,000 units coming onto the market in Jakarta whiletransactions totaled about 12,000 units during that year - comparing favorably to 6,500 units sold in 2008.
Now, with relatively similar socio-political settings and similar interest rates, can history repeat itself? Are we going to see another record high on new launches and property transactions this year?
Most views, including ours, tend to see this as unlikely considering the current economic context which is increasingly affected by the global financial crisis.
The cautious approach taken by the banks can be seen as an indication on how slow business activity would go this year.
On the high risk environment due to uncertainty in the economy (meanwhile, we think uncertainty in the socio-political environment is less threatening, judging from the 2004 election experience) it is anticipated that both individual and corporate business expansions may go into lower gear.
As such, we are not expecting any significant growth to take place in the supply and demand side of the property market this year.
Thus, the main play for 2009 would be focused on existing marketing and quality review to sharpen the competitive edge of projects.
Having said that, it is none other than the consumers who will enjoy the most benefit.
Any prospective buyer or newly identified incoming offer would be treated more seriously given these market conditions. Now is probably the right time to hunt for a good quality property at a good price.
So if you are a cash-rich investor who has enjoyed the taste of a high deposit interest rate, why not try to set aside an amount to increase your property portfolio.
Who knows? Maybe you could get a good bargain. It would pretty much depend on how low we can go.
The writer is the head of research department at Jones Lang LaSalle Indonesia.
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