However, the impact of the VAT incentive policy this year appears to have been less effective in stimulating mortgage growth. This outcome contrasts with 2021, when the VAT incentive policy was first implemented and proved effective in boosting mortgage growth.

Why did the VAT incentive deliver uneven results in 2021 and 2025? And does it still have the momentum to meaningfully support the property sector?

The government-borne property VAT policy, implemented between April and December 2021, consisted of two schemes. The first provided a 100 percent VAT exemption for landed houses and apartment units priced up to Rp 2 billion (US$120,000), while the second offered a 50 percent VAT exemption for units priced between Rp 2 billion and Rp 5 billion. Under this policy, VAT on eligible property purchases was fully or partially borne by the government.

The VAT incentive was effective in increasing new home sales as well as overall mortgage and apartment loan growth. According to data from industry association Indonesia Real Estate (REI), commercial housing sales reached 73,518 units in 2021, surging 223.6 percent compared with 2020. In addition, total mortgage and apartment loan growth accelerated to 9.8 percent year-on-year (yoy) in 2021, compared with 3.4 percent yoy in 2020.

This year, the VAT incentive policy was reinstated with a 100 percent exemption applied to a tax base of Rp 2 billion for homes priced below Rp 5 billion.

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Nevertheless, the policy appears to have been less effective in supporting the housing sector. This is reflected in the slowdown of total mortgage and apartment loan growth from 10.2 percent yoy in October 2024 to 6.8 percent yoy in October 2025. Mortgage lending serves as a reliable proxy for housing sector performance, given that around 70 percent of home purchases in Indonesia are financed through mortgage and apartment loan schemes.

The differing effectiveness of the VAT incentive policy in 2021 and 2025 can be attributed to economic conditions and the responses of key market participants, including households, developers and banks.

During the initial implementation in 2021, the property sector was experiencing substantial pent-up demand following the COVID-19 pandemic. As a result, households were encouraged to purchase homes once the VAT incentive reduced effective prices.

At the same time, banks responded aggressively, supported by ample liquidity, low housing loan nonperforming loan (NPL) ratios and post-pandemic economic recovery. Developers also actively promoted “zero VAT” campaigns to reduce large inventories of ready-to-occupy housing that had accumulated during the pandemic.

The conditions were markedly different in 2025, when the economy entered a more normalized phase but was confronted with heightened uncertainty and weakening purchasing power.

Consequently, households became more cautious about purchasing homes, considering not only prices and down payments but also monthly installments in terms of affordability. Developers tended to internalize part of the VAT incentive benefit through price adjustments to protect margins amid rising construction costs.

Meanwhile, banks became more selective in extending mortgage and apartment loans in order to preserve asset quality, as housing sector NPLs increased from 2.51 percent in October 2024 to 3.22 percent in October 2025.

The contrasting effectiveness of the VAT incentive policy in 2021 and 2025 indicates that tax incentives are highly dependent on prevailing economic conditions. In 2025, the key challenges facing the property sector extend beyond house prices to include installment affordability, household income stability and collateral risk. As such, future VAT incentive policies need to be complemented by additional measures to effectively support the housing market.

Going forward, strategies to stimulate the property sector should prioritize installment affordability rather than focusing solely on house prices.

The government could adopt a scheme similar to the Housing Finance Liquidity Facility (FLPP) but with greater flexibility for middle-income households or an extended FLPP, such as subsidizing mortgage installments during the first three years. This approach differs from the current FLPP scheme, which targets low-income households and offers a fixed 5 percent interest rate until loan maturity.

The proposed scheme above could be designed for middle-income households that do not qualify for the FLPP but are not fully able to absorb commercial mortgage rates. Importantly, housing price caps would need to be clearly defined in an extended FLPP to ensure fiscal sustainability.

Besides installment affordability, policies aimed at reducing collateral risk are necessary to encourage banks to expand housing credit. Beyond borrowers’ repayment capacity, issues related to collateral, such as land and building legal uncertainties, often constrain mortgage lending. This prompts banks to adopt a more cautious stance in extending housing loans. Strengthening legal certainty of collateral is therefore essential to lowering collateral risk.

The government could introduce a limited collateral risk guarantee scheme covering legal disputes, incomplete documentation and asset execution difficulties. Such a scheme would help make the cost of credit and collateral risk more predictable and manageable from the banking perspective, thereby encouraging mortgage lending without compromising prudential standards.

In conclusion, the differing effectiveness of the VAT incentive policy in 2021 and 2025 highlights that fiscal incentives are highly conditional on economic circumstances. Consequently, a VAT incentive policy requires support from complementary policies.

Going forward, property policies should address not only price affordability but also installment affordability and collateral risk management. Well-targeted and integrated fiscal and monetary policy coordination will be more effective in revitalizing the property sector and supporting stronger economic growth.

*****

The writer is an industry and regional analyst at Bank Mandiri.

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