The property sector will face some risk factors in 2023. The first risk factor is a global economic recession, which will affect the domestic economy. It could lead to a decrease in consumer confidence, which in turn causes people to put off buying property.

This situation was also demonstrated by Bank Indonesia’s (BI) consumer survey in October, which showed the proportion of respondents who had a plan to allocate excess income in the next 12 months for investment in property declined from 13.49 percent in September to 12.65 percent in October. Moreover, the proportion of respondents who planned to buy or build a house in the next 12 months also decreased.

Besides the global economic recession, rising inflation is also a challenge to the property sector in 2023, especially with increasing prices of building materials, which will lead to an increase in property prices, thus making people put off buying property.

Historical data show that the increase in building material prices has not been fully transmitted by developers to house prices. BI's residential property price survey showed that house price growth in the third quarter of 2022 was 1.94 percent year-on-year (yoy), lower than the wholesale price index for residential and non-residential buildings in September 2022 of 5.51 percent yoy. We believe this will reduce developer margins.

Other impacts of rising inflation are reduced people's purchasing power and decreased consumer confidence, which cause consumers to postpone property purchases.

Another risk factor in the property sector in 2023 is an increase in interest rates, which could also cause people to put off buying property. We believe that interest rate hikes will continue until the first half of 2023 but rates are expected to stabilize or decrease in the second half.

The risk of rising interest rates mainly impacts on residential property due to the majority of residential property purchases using mortgage loans.

According to the BI survey, the proportion of mortgages in residential property purchases was 74.53 percent in the third quarter of 2022. Cash payments accounted for 8.1 percent, and cash installments 17.39 percent.

However, we believe that the increased BI Seven-Day Reverse Repo (BI7DRR) rate will not have a significant impact on mortgage rates. Historical data show that a downward trend in mortgage rates has occurred since 2016, despite an increase in the BI7DRR.

The BI7DRR rate increased by 175 basis points (bps) from 4.25 percent in April 2018 to 6 percent in November 2018, while mortgage interest rates decreased from 9.7 percent to 9.3 percent in the same period.

The downward trend in mortgage interest rates has occurred due to increasingly fierce competition between banks and the increased efficiency of banks. Currently, several banks are aggressively providing fixed and low mortgage interest rates for the first one to five years for property loans.

On the other hand, the housing backlog is a positive catalyst that drives the property sector, especially housing.

The national economic social survey data show that households that did not have their own home in 2021 amounted to 14.3 million, so the potential for the property market is still relatively attractive in the medium term. By province, the largest housing backlogs occurred in West Java, East Java, Jakarta and North Sumatra.

Besides the housing backlog, property incentives such as a 100 percent loan-to-value are also a positive catalyst in the property sector. BI has extended the 100 percent loan-to-value or zero percent down payments until December 2023.

The government has also increased the Housing Financing Liquidity Facility (FLPP) budget in 2023 to Rp 25.2 trillion for 220,000 houses. This value is higher than figures in 2022 and 2021, which were Rp 23 trillion for 200,000 houses and Rp 28.2 trillion in 2021 for 200,000 houses respectively.

We believe that government support and incentives in the property sector are needed to boost the property sector in 2023. It is our view that property incentives in 2021 such as government-borne value added tax (VAT) incentives for the property sector, have been quite effective in driving the property sector.

A survey in mid-2022 by Rumah.com also showed that 43 percent of respondents expect to speed up their plans to buy a house due to VAT subsidies and 35 percent of respondents are targeting houses with higher prices due to VAT subsidies.

Furthermore, we see an increase in demand for property mainly in the middle-class segment and for end consumers. There is a high potential demand especially from the productive-age population and millennials.

Nowadays, the largest population in the productive age is millennials at 26 percent of the total population. Millennials’ preference for residential property is the medium-small type. This is shown by the highest housing ownership loan growth occurring in medium types (with a floor area of between 22 square meters and 70 sq. m), which reached 9.8 percent yoy and 7.8 percent year-to-date in September 2022.

In conclusion, we expect that the property sector in 2023 will face challenges amid the recovery. The expected global economic recession, rising inflation and interest rates will make people careful in spending and postponing property purchases in 2023. Therefore, developers should make creative efforts to encourage people to buy property.

Amid rising mortgage interest rates, developers could try to offer solutions such as cooperating with banks to offer mortgages at fixed low interest rates for the initial three years.

Overall, the property sector in 2023 will depend on government policies in maintaining national economy stability. To boost the property sector in 2023, the government could also continue providing incentives in the property sector, such as government-borne VAT incentives.

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The writer is senior regional analyst at Bank Mandiri

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