T

he latest survey by Bank Indonesia (BI) has found that property prices in major cities in eastern Indonesia have shown an upward trajectory because of the stronger purchasing power of its citizens and a rise in housing investments.

In the April to June period the index of residential property prices in Manado, North Sulawesi, saw the biggest quarter-to-quarter increase of 9.5 percent, followed by Makassar, South Sulawesi, with a rise of 6.5 percent.

The increase of property prices in the two cities was way above the overall average of Indonesian cities. BI'€™s index of residential property prices, which includes 16 major cities in Indonesia, only rose 1.7 percent quarter-to-quarter in the same period.

'€œThe significant increase [of housing prices] in Manado and Makassar is in line with the economic expansion in the two areas. They are both gateways for economic development in the eastern areas, which consequently encourages developers to continue building residential properties,'€ BI explained in its report.

However, the central bank shrugged off concerns of a potential bubble in the housing sectors in Manado and Makassar, arguing that the growth of property prices was healthy, a reflection of a stronger purchasing power among citizens.

'€œThose seeing a steep rise in prices were the big houses,'€ Hendy Sulistiowaty, BI executive director for statistics, told a press briefing on Wednesday. '€œIt'€™s good, as it shows that rich people are now growing in numbers in the eastern part of Indonesia.'€

BI'€™s report also warned about the potential acceleration of prices in other cities in the upcoming months.

In the third quarter this year housing assets in Bandar Lampung and Batam were estimated to climb 6 and 4.8 percent, respectively, replacing Manado and Makassar as the cities with the fastest-
growing property prices during that period.

'€œIf people want to invest in housing they don'€™t look in well-established areas with already high prices '€” they will look for areas that are still cheap in price, but have development potential,'€ said Ferry Salanto, an associate director of research with Colliers International, a US-based real estates services firm.

The rapid economic growth in some resource-rich provinces in eastern Indonesia also drove up demand for property there, consequently driving up housing prices, he explained on Wednesday.

BI has introduced various regulations to put the brakes on the country'€™s too-fast growth of property prices, such as the loan-to-value ratio requirement, which requires customers to be able to provide a minimum down payment of 30 percent before applying for a mortgage.

BI Deputy Governor Halim Alamsyah once warned that prices of houses 70 square meters in size and larger had a tendency to '€œbubble'€ as their costs were '€œno longer rational'€.

To deal with the issue, last year the central bank modified the loan-to-value ratio to become even stricter. Those wanting additional mortgages must set aside a 40 percent down payment for a second house and 50 percent for the third residence and each one afterward.

While benefitting from the growth in property prices, housing developers expressed concerns over the country'€™s high interest rate regime, after BI lifted the benchmark interest rate by a cumulative 175 basis points to 7.5 percent throughout last year.

According to BI'€™s latest survey, 22 percent of property developers deem the high interest rate for mortgages as the major factor potentially hampering their business, followed by expensive building materials (18.4 percent) and the strict down payment requirement (18.1 percent).