On every continent, housing development is considered one of the hottest sectors in the economy. We also should never forget that it was a crash in housing mortgage performance that led the financial world into chaos. Residential property came up as a very sensitive issue, both as social and as an investment commodity. Besides the effect of population growth, demand was the other strong factor. Every child grows up, finishes school and secures a job before they need a place to live independently. The simple analogy in the previous sentence illustrates the inelasticity in housing demand: Everyone needs education, every family needs a house as well.

The housing market in Indonesia can be so attractive due to its demography. Looking at studies and global projections, the population is not expected to decrease any time soon and growth in the birth rate might not slow down until 2030. Statistics Indonesia (BPS) predicts that by the end of 2035, our population might reach 305 million. Another study from Lembaga Demografi University of Indonesia also shows that, by that time, the millennial generation will dominate the population, which also increases life expectancy. This means that Indonesians are predicted to have a longer life and they need a place to live.

So, it is plausible to assume that the housing market will always get stronger over time as a result of the influential demand, young population and huge source to supply housing. The fact is, even though our housing market is still rising strongly, there are several important things we have to understand to manage this market.

The first thing is the size of the housing backlog. Using Susenas 2018, we estimate the current total backlog stands at around 12.1 million. This number is in line with the population density per area, with the backlog in West Java, Jakarta and East Java coming as the top three with a backlog of 2.67, 1.27 and 1.18 million per province respectively. In the larger picture, the size of backlogs are dominating in Java and Sumatra with 57.5 and 21.3 percent respectively compared to the national population. Data from BCI Asia shows that by the end of 2019 there will be 130 thousand new homes across Indonesia, including houses and apartments, with 63 percent of the new homes in DKI Jakarta and West Java.

However, even though Java and Sumatra are the largest markets for housing due to the size of their backlog and population, it does not mean those are the most strategic areas for market penetration. The government target is to minimize the backlog by focusing on subsidized-credit scheme programs, such as Housing Financing Liquidity Facility (FLPP) and One-Million-Housing Project, for first-time buyers. Thus, it would be better to see the backlog as a proportion of all households who already have a house.

Examining all provinces in Indonesia using Susenas 2018, there are eight provinces in need of more attention to the housing ownership rate per household, where the homeownership rate per household is below 80 percent. DKI Jakarta stands as the poorest, with almost one out of two households not owning a house. This means half of your neighbors are tenants or do not own a house anywhere in Indonesia.

Moreover, the homeownership rate in northern Sumatra is around 70 to 74 percent, in northern Kalimantan 74 to 76 percent, and in West Papua 77 percent. Interestingly, West Java and East Jawa as the top two most populated provinces rate highly with 80 and 89 percent respectively. With this descriptive proportion, strategic penetration for the housing market can be seen not concentrated on Java but scattered across northern Indonesia on numerous islands.

Another essential element to understand is the market condition for commercial property. Nowadays, people tend to live close to their work, and with the expected increase in millennials/productive age proportion within our population, the demand for office and commercial area is expected to rise. But it has not done so. Since 3Q16, year-on-year growth of rental prices for office spaces has never been positive. The same situation can be seen with rental prices for shopping malls. By 1Q19, rental price growth for offices and shopping malls were 3.7 and 0.2 percent lower than the same period last year, with an average annual growth of -3.15 and -1.1 percent respectively.

Slower rental price growth in commercial property is sufficient to illustrate that business is currently shifting. With the rise of digital start-ups and coworking spaces, office meetings have transformed from physical to video call, and from commuting in rush hour to flexi-time work from home. Even tech-center and creative-hub Silicon Valley, as reported by The Economist in September 2018, is now being neglected by up to 46 percent of its occupants due to costly rental and overpopulation. Relying on the trends, the opportunity to develop affordable housing outside the downtown area seems more feasible than ever. People, especially millennials, have more options to choose where they work from, as long as transportation and internet are available.

To sum up, Indonesia is currently on the right track to raising the overall housing market. FLPP, with an expected price adjustment to be announced later this year, has booked 27,762 units within the first quarter. This is equal to 47.9 percent of full-year realization in 2018. Not only obtained throughout the election period, this indicates the effort for low-segment client penetration can be acquired in the market.

In the future, the government together with private developers needs to explore more markets in those eight provinces with a low rate of homeownership. The idea of moving the capital city or cleaving urban-business areas into several city centers within the peripheral/suburban area might also attract more people and drag the inelastic housing demand out of town. Possibly it will also bring the lower capital cost to developers and even more potential benefits to customers: lower transportation cost.

_______________

The writer is an industry analyst at Bank Mandiri

Popular

Volcano erupts in North Sulawesi, hundreds evacuated

Dubai roads, airport reel from floods after record rains

Ramadan boosts consumer confidence, retail sales