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Chapter 4

MORTGAGE FINANCING AND CONSUMER CREDIT,AND THEIR IMPLICATIONS TO FINANCIAL STABILITY:

A CASE STUDY OF INDONESIA1

ByWahyu Hidayat Sulistyawan2

and

Shinta Fitrianti3

1. Introduction

Household consumption in Indonesia occupies the largest portion of grossdomestic product compared to export. Household consumption grew approximately11% in 2011 and 2012. Such high consumption demand is mainly driven byIndonesia’s huge population since Indonesia is the fourth most populated countryin the world with around 240 million people in 2012. Meanwhile, as the nationalincome per capita expanded from $ 2,200 in 2000 to $ 3,563 in 2012, the demandfor consumer credit also increased. The share of consumer credit to total bankingloans grew from approximately 8.8% in 1995 to 29.5% in 2012, with an exceptionof a decrease in consumer credit during the Asian financial crisis in 1998 whenthe consumer credit declined by 5.5%.

On one side, the high reliance on consumption is advantageous for theIndonesian economy in maintaining sustainable growth, particularly amidst thecurrent weakening of the global economy as demand from the developed countriesdeclined. Nevertheless, the growth of consumer credit may pose some challengesand risks to financial stability and to the economy as a whole.

In Indonesia, consumer credit encompasses housing loans/mortgages,automotive loans, multi-purpose loans and other credit. Housing loans, auto loans,

________________1. Disclaimer: This paper’s finding, interpretations, and conclusions are entirely those of the

authors and do not represent the views of Bank Indonesia, or its Board of Governors. Theauthors are grateful to receive any suggestion for review, comments, and discussion.

2. Senior Researcher, Department of Macro Prudential Policy, Bank Indonesia.3. Economic Analyst, International Department, Bank Indonesia.

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and multi-purpose loans share the largest parts of consumer credit in Indonesia.Therefore, this paper will focus on these types of loans, putting greater emphasison housing loans.

In recent years, Indonesia has been experiencing higher growth in theproperty/real estate sector. Various types of property are built, including houses,condominiums, hotels, condotels (condominium and hotel on one building), housingstores (a house and a store in one building) and housing offices (a house andan office in one building), with prices rising persistently. Such phenomenon isbelieved to be contributed by the consistent growth of property loans. There isalso a tendency that speculative motives induce the property demand. InIndonesia, property becomes an investment alternative for certain people whoassume the property price will continue to increase in the future. They buyproperties to be re-sold for profit, and not for self-occupation. Such behaviourdrives up property prices in general, and makes the price unaffordable, particularlyfor the low/medium income people who have not owned any first house. Forbanks with large exposure to property loans, when the property price escalatesextremely high, they may face increasing risks of non-performing loans.

This paper will elaborate the recent trends and developments in Indonesia’sbanking mortgages and consumer credit, and identify the underlying drivers aswell as several approaches for identifying the potential vulnerabilities. Thisdescription will be followed by an analysis of the implications and risks of creditdevelopment on financial stability, and recommend the possible measures.

2. Mortgage Finance and Consumer Credit: Developments and Trends

2.1 Macroeconomic Overview

2.1.1 Economic Growth

Indonesia has been maintaining strong growth amidst the slowdown in theglobal economy. During the years leading up to the 1997-1998 Asian financialand economic crisis, Indonesia was experiencing high and sustained economicgrowth. The average annual GDP growth from 1970 until 1996 was 7.33% yoy.However, the crisis impacted the economy severely and turned the annual GDPgrowth rates into 4.70% and -13.3% during 1997 and 1998, respectively.Indonesia’s economy started to recover in 2004 and gained momentum over theyears thereafter. In particular the economy grew by 6.1% yoy in 2010, up from4.5% yoy in 2009, despite the slowdown in the global economy. In 2012,Indonesia’s real GDP growth was 6.2% yoy.

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2.1.2 Inflation

Indonesia has been experiencing relatively high and volatile inflation, acommon phenomenon to most developing countries. The level of inflation reachedits record in 1998 up to 77.64% when Indonesia was hit by the economic andfinancial crisis. The subsequent highest record was 18.38% in November 2005driven by the reduction of fuel subsidies in October 2005 to align with the shockof international oil price. The escalating international price of commodities duringthe first three quarters of 2008, and domestic supply shortage during the secondsemester of 2010 drove prices upward. Since 2011 inflation tended to decreasefrom 7.02% in January 2011 to 3.79% in December 2011. Inflation remainedcontained during 2012 and recorded 4.3% yoy, achieving the government’s targetrange of 4.5% ± 1%. Meanwhile, the target of inflation for 2013 as establishedby the government was 4.5% with ± 1% deviation.

Graph 1Economic Growth

Source: World Bank.

Graph 2Inflation in Emerging Economies

Source: Bloomberg.

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2.1.3 Inflation and Interest Rates

Bank Indonesia (BI), as Indonesia’s central bank and monetary policyauthority, has one ultimate mandate, i.e. to establish and maintain rupiah stability.This objective incorporates two key aspects: the first is a stable rupiah for goodsand services, reflected by the inflation rate. Meanwhile, the second is aspect isreflected by the development of Rupiah exchange rate against other foreigncurrencies.

To implement monetary policy, BI has formally adopted Inflation TargetingFramework (ITF) as a working framework on July 2005. The inflation targetis the level of inflation that must be achieved by BI in coordination with theGovernment. The target is established by the Government. In this regards, BIattempts to manage pressure on prices from aggregate demand relative to supplyside conditions. The policy is not intended to respond to inflationary spikes arisingfrom factors representing temporary shocks that will dissipate on their own withtime.

For the inflation target to be reached, monetary policy is implemented witha forward-looking approach, meaning that any change in the monetary policystance is undertaken after evaluating whether future developments in inflationare on track with the established inflation target. At the operational level, themonetary policy stance is reflected in the setting of the policy rate (BI Rate)with the expectation of influencing money market rates and in turn the depositrates and lending rates in the banking system.

BI Board of Governors announces the BI Rate on monthly Board ofGovernors meeting and implements the decision on BI monetary operationsthrough liquidity management in the money market to achieve the monetarypolicy operational objective. The operational target of monetary policy is reflectedby interest rates on the Overnight Interbank Money Market, which are expectedto be followed by deposit interest rates, and in turn, the banking credit interestrates. By considering other factors in the economy, BI will generally raise theBI Rate in the future when inflation is estimated to exceed a predeterminedtarget; and BI will lower the BI Rate when inflation is expected to be belowthe target that has been set.

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2.1.3 Related Banking Policy

Since the end of 2008, the BI Rate gradually went down from 9.50% inOctober 2008 to 6.00% in November 2011. The rate was further lowered 5.75%on February 2012. The level was preserved until May 2013. The declining policyrate were followed by several policies such as Statutory Reserve-Loan to DepositRatio Policy4 and Announcement of Prime Lending Rate Policy5 in order toencourage intermediary activities and transparency, and resulted in decreasingbank lending rate.

Graph 3Inflation and Policy Rate

________________4. Regarding the banking liquidity conditions as well as the role of the bank in intermediary

functions, since March 1, 2011 the Rupiah Statutory Requirement-Loan to Deposit Ratioprovisions (SR-LDR) is set within a range that is considered capable of encouraging bankingintermediation function but still maintain the prudential principle, i.e., 78%-100%. Withthis provision, the bank that previously had LDR less than 78% was encouraged to disbursemore credit.

5. The BI Circullar Letter Number 13/5/DPNP dated February 8, 2011 required banks withtotal assets of Rp 10,000,000,000,000 (ten billion rupiah) or more to publish its PrimeLending Rate (PLR) information in rupiah through (1) notice boards in each Bank Officeand (2) the main page of bank’s website and newspapers since April 2011. The PLR isthe interest rate base used by the bank as a reference in determining the interest rates ofto the debtor. The calculation of the PLR is the result of the calculation of 3 components:(1) Cost of fund; (2) Overhead costs incurred in the process of granting Bank credit; and(3) Profit margin. The PLR has not taken into account the risk premium component, themagnitude or size of which is dependent on banks’ evaluation regarding the riskiness ofeach individual debtors or group of debtors. Thus, the effective interest rate charged forloans to each individual debtor or group of debtors, which have incorporated such riskpremium, may differ from the PLR.

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Considering Indonesia’s stable economic conditions, low inflation and declininginterest rates, the condition is conducive for credit expansion. Granted by thesluggish global economic situation, consumer credit is the easiest area that canbe focused on. Therefore, there is a possibility that consumer credit may hike,and may require anticipative measures in order to avoid any unwanted effects.

2.2 Banking Consumer Credit Overview

Indonesia’s banking credit are broadly categorised into Working Capital Credit,Investment Credit, and Consumer Credit. The first two categories are intendedfor productive purpose and their share have been dominant, around 70% in 2012.Meanwhile, although consumer credit plays a relatively smaller part, the shareincreased from 21.6% in 2002 to 29.5% in 2012.

Table 1Indonesian Banking Average Lending Rate

Source: Bank Indonesia.

Graph 4Indonesian Banking Average Lending Rate

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Consumer credit comprises housing loans/mortgages (including landed houseloans, apartment loans, house & store loans, house & office loans), automotiveloans, multi-purpose loans, home appliance loans and other aggregate consumercredit. The share of each type of loans from overall banking consumer loanswere 30.2%, 12.3% and 32.2% or 8.9%, 3.6% and 9.5% respectively of bankingtotal credit. In December 2012, housing loans, auto loans and multi-purpose loanswere the three largest consumer credit. Throughout 2012, housing loans andautomotive loans grew by 22.4% and -6.8% and (yoy), respectively. Such growthis lower than the previous year, in which the growth of housing loans andautomotive loans were 32.9% and 32.1% (yoy) respectively, which were farexceeding the aggregate loan growth (24.9% yoy).

Graph 5

Table 2

Source: Bank Indonesia.

Source: Bank Indonesia.

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High growth on housing loans and automotive loans was partly driven byhigh demand for houses and by inefficient public transportation in Indonesiawhich thus force people to use private transportation, such as cars andmotorcycles. Automotive loan growth was also driven by relatively relaxed loanrequirements. Usually, automotive points of sales or dealers, in collaboration withbank or financial institution, offer low down-payment along with loose requirement.Should the auto loan debtor be unable to pay their monthly installment in thefuture, the purchased vehicle will be recalled by the bank.

High growth on housing loans and auto loans were accompanied bysatisfactory credit performance. Non-performing loans (NPLs) of both housingloans and auto loans were relatively low. As of December 2011, the NPL wasabout 1.8%. However, in regard of auto loans, if the number of vehicles recalledby the bank due to the failure of installment payment were taken into account,the NPL was about 10%.

2.3 Property Sector Overview

The development of the property sector in Indonesia is propelled by variousfactors, mainly by the strong economic growth and increasing householdconsumption. The demand for property, particularly for housing, continues toburgeon from time to time, as the population increase rapidly with an annualgrowth rate of 1.49%. The growth of per capita income, household income, andthe expanding middle-income class enhance the housing demand as well. Risingincomes increase people’s disposable income, purchasing power, as well as saving,and allowing them to buy or invest on new property.

Graph 6

Source: Bank Indonesia.

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Rapid urbanisation also drove demand further. In particular, the populationgrowth in DKI Jakarta province to a large extent is affected by migration fromall over Indonesian territory, motivated by better jobs and education. The sideeffect emerged in the wake of urbanisation is the worsening traffic situation andrising land prices, which spurred the demand for city-based apartments.Responding to this, the government is in the process of providing and improvingthe necessary infrastructures, such as highways and mass transportation.Nevertheless, this turns out to be a vicious cycle, as infrastructure developmentinduces further demand for housing as well, particularly in the capital’s surroundingrural areas.

From the supply side, both domestic and foreign investors perceivedIndonesia’s high and fast-growing population, robust macroeconomy, and politicalstability as favourable investment opportunities in the property sector. Moreover,Indonesia’s investment grade rating6 becomes a good incentive for the expansionof investment, particularly amidst the global economic uncertainties.

In particular, the Global Property Guide positioned Indonesia as offering thethird highest yield in property investment in Asia region, after Malaysia andThailand. Survey by BI also confirmed such observation and added that theproperty price in Indonesia is considered to be cheaper than in the other Asiancountries, but offers higher yield. With such positive economic outlook, the propertysector in Indonesia is projected to continue to advance steadily.

From the funding aspect, high and stable economic growth has been helpingto boost banks’ balance sheets, adding further to their confidence on the securityof their lending. Stable inflation expectation, as indicated by a lower and stablecentral bank’s policy interest rate, support this stance as well. This is obviousin recent years, as competition among banks to win customers are getting moreand more intense, many banks are offering easy mortgage credits. In general,banks have been offering fixed and low rates for the first two-year period ofmortgage installment to facilitate people in obtaining a housing loan.

Nevertheless, the pace of housing ownership is not at the equal pace asthat of population growth. On 2011, around 77.7% of households owned houses,while 8.68% of households fulfilled their housing needs by rent. Bahana Securitiespredicts that the high housing demand will continue to persist over the next twodecades, with a total backlog of 8.6 million houses. At the beginning of 2012,

________________6. Based on Moody’s and Fitch sovereign credit ratings. Moody’s rating for Indonesia sovereign

debt is Baa3 (January 2012). Fitchs credit rating for Indonesia is BBB- (December 2011).

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the Association of Real Estate Indonesia (REI) estimated that the total need forhousing can reach 2.6 million per year. Meanwhile, in mid-2011, based on theresult of its 2010 census, Statistics Indonesia (BPS) stated that Indonesia’s housingshortage approximately is 13.6 million units. The backlog is predicted to increaseto 15 million units by 2015.

Strong housing demand, along with increase in price of construction materials,workers’ salaries, and permittance fees, raised property prices as well. Cushman& Wakefield Indonesia noted that in 2011 landed house price increased by 27.7%and in 2012 by 27.8%. Meanwhile, the Bahana Securities analyst estimates thatprice grew by 30% during 2012, and predicts that house prices will further rise15 to 20 % in 2013-14.

On the regional aspect, some areas are experiencing faster growth in pricethan the others. In this regard, Jakarta and Bali recorded the highest risingproperty prices during 2012, dominated by upscale properties in the elite area.During 2012, property prices in Jakarta and Bali rose 38% and 21% respectively.The spike surpassed many other elite cities such as Dubai (20%), Miami (19.5%)and Sao Paulo (14%). Jakarta benefited from strong continous GDP growth,which has stood at, or above, 6% for five out of the past six years and fromrapid growth in its middle-class7.

2.3.1 Bank Indonesia’s Policy Responses

Such high growth of housing and auto loans became a concern of the centralbank. High housing loan growth drives up property prices, particularly in Jakartaand its surrounding areas. On the other hand, there is also a tendency for theloan growth to be driven by speculative motives which boosts property priceshigher, thus making it difficult for first-home buyers to obtain affordable houses.Based on a residential property survey conducted by BI, small type of buildingexperienced the highest price increase.

With regard to auto loans, relaxed auto loan requirements and paymentschemes may lead people to take credit beyond their funding capacity, and thusmay trigger credit risk. As a matter of fact, BI simulation showed a negativecorrelation between down payment (DP) and non-performing loan (NPL). Loanwith smaller DP will likely has higher NPL, and vice versa.

________________7. Knight Frank, Wealth Report 2013.

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Responding to such development, in March 2012 BI issued a regulationregarding maximum Loan-to-Value (LTV) for housing loans and minimum downpayment (DP) for auto loans. The action deploys the countercyclical approachwhich implements tighter regulation during periods of high credit growth. Theregulation aims to improve banks’ prudentiality in providing housing loans andauto loans, and to reduce the excessive growth of consumer loans in order toprevent vulnerabilities in the financial sector. This provision will be a screeningmechanism for potential buyers as well. Higher down payment will require aprospective borrower to be viable and bankable, and reduce monthly installments.This will reduce credit risk.

Several months after the implementation of the regulation, the growth ofauto loans decreased from 36.1% in December 2011 to -9.6% in April 2013.There was indication that the auto loan consumers shifted to multi-financecompanies that have looser requirement8. However, as multi-finance companiesbegan to implement minimum down payment, the growth of auto loans loweredfrom around 26.7% in December 2012 to 16.3% on April 2013. The nominalNPL in banking auto loans also decreased and was stable at around 1%.Nevertheless, the housing loan growth was only softened temporarily. The growthdeclined to 39.5% in November 2012 from 50.3% on May 2012 after theimplementation of LTV regulations, and returned to 45.1% on April 2013.

The decline in housing loan growth upon LTV enactment did not restrainthe rising property prices as well. It has been observed that there were consumerspaying property purchase in cash, in particular for purchase of larger type ofhouses, and thus they were not influenced by LTV policy. Nevertheless, theimpact of such consumer behaviour on raising the property prices was similar,and even may trigger further property overvaluation. This condition in turnrequires consumers who needs housing loans to borrow more to be able to buyproperties.

3. Review of Related Literature

Development and problems in the property and real estate sector impactnot only the property sector itself but also the stability of the financial system.Although the failure of an individual enterprise in the property sector may havelimited influence on financial stability, but if the number of companies failing at

________________8. Minimum down payment in banking are 30% for car and 25% for motorcycle. Meanwhile,

multi-finance companies’ thresholds for minimum down payment are 25% for car and 20%for motorcycles.

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the same time are relatively large and are accompanied by high level of outstandingdebts, the stability of the banking and financial systems may be harmed.Furthermore, since the property and real estate industries are closely relatedwith various supporting industries, including the financial and banking sector, anydisruptions may trigger crisis in the wider economy.

Experience from financial crises, both in the developing and advancedeconomies, indicated that the property and real estate sectors play a significantrole in the financial system stability of a country. The financial crisis in Indonesia(1998), Japan (1990) and the United States (2007) were closely related to thedevelopment of property and real estate sector. The other countries notably theUnited Kingdom and three of the Nordic countries in the 1980s and 1990sexperienced financial instability, and one of the causes was due to the propertysector in these countries (Greef and Haas, 2000). Moreover, due to the systemicrole of the US economy and currency, the US subprime mortgage crisis in 2007had escalated into a global financial crisis, with worldwide spillover which furthertriggered the global economic crisis.

3.1 Lesson from Spanish Housing Bubble

The Spain housing bubble began in 2005 (Hadzelec and Prieto, 2012).Previously, Spanish banks invested strongly in the real estate sector during the1990s and 2000. Spaniards’ demand for property surged exhorted by the mediaand economists to buy property. House prices rose, in line with the increasingdemand. During Spain’s period of economic growth from 1997 to 2007, houseprices grew by 155%, or 8% annually. Nevertheless, salaries remained and thusraising the ratio of housing price to earning average to almost tripled that of theEU-15 countries.

House prices fell by 22% between the onset of the financial crisis in 2008and 2011. In order to keep the prices from falling, the banks were allowed tohold on to stocks of unoccupied housing. Banks are also protected their interestsby rejecting new loans to small- and medium-sized businesses. This in turn ledto an increase in unemployment and further harmed the prospect of economicrecovery. In addition to the housing bubble as Spain’s structural problem, thecrisis was also contributed by uncontrolled expansion of the fiscal spending ofthe government.

Actually, Spain’s banking system is structured in two tiers: large banks(Santander, BBVA) and smaller, such as territorial cajas (Summers, 2012). Thecaja system dates back to the nineteenth century. Cajas at that time were meant

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to be almost akin to village or rural financial centres. As a result, the Spanishcountry is virtually saturated with them. There is approximately one caja branchfor every 1,900 people in Spain, which account for 50% of all Spanish deposits.The caja banking system was virtually unregulated until 2010-2011 and were notrequired to reveal their LTV ratios and the quality of collateral they took formaking loans. After the Spanish property bubble peaked in 2007 and when thelarger Spanish banks began slowing the pace of their mortgage lending, thecajas went “all in” to the housing market, offering loans as well. Cajas playedsignificant role. In 1998, the Spanish mortgage debt to GDP ratio was onlyapproximately 23%. By 2009 it had more than tripled to nearly 70% of GDP,and cajas owned 56% of all Spanish mortgages.

3.2 Global Trend in Housing Prices Following US Subprime Crisis

Survey carried out by Case and Shiller (2012) indicated that US home buyersstill view that house prices will likely rise in value over the next 10 years. Buyerspredict that there will be steady long-term increases in home prices, even afterUS subprime financial crisis in 2009 in which US property prices fell more than30%. With such continuing confidence, America’s housing market seems to beresuming. Nationally, prices jumped more than 12% in January 2013 over theprevious year, marking the largest increase since 2006. Prices are up in morethan 100 cities, with increases above 10% in more than 47 major centres (Zillow,2013).

The same sign of real estate revival is occuring in other countries as well.Swiss bank, UBS, in December 2012, warned that the Swiss national “real estatebubble index” had hit its highest point in 20 years. Such development promptedthe government to require Swiss banks to preserve more capital reserves onFebruary 2013. In Norway, home prices have quadrupled over the past decade,even after being adjusted for inflation. The International Monetary Fund (IMF)warned that the country’s housing market may be overvalued by 20%. In HongKong, home prices increased more than 160% since 2008, with the IMF warningof a “risk of an abrupt correction.” Even in Ireland, where house prices fellmore than 40% at the depths of the crash, reported its largest price increasein December 2012 since the collapse of its housing market (McMahon, 2013).

Like the pre-2008 housing bubble, which sent house prices skyrocketing inSpain, Ireland, Denmark and Australia, the current boom is also led by prolongedlow interest rates as part of the monetary stances taken by countries like Norwayand Switzerland in order to hold their currencies from appreciating too rapidly.Nevertheless, the different driver of today’s prices is that such price developments

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are also helped by the wealthy global investors looking for safe havens to investtheir money, not by any explosion of subprime lending like the one that fuelledthe 2008 bubble. In this regard, Paddy Dring, the head of international residentialproperty at Knight Frank, affirmed that today’s real estate boom is driven byfundamental changes in the global economy, in particular by the abundance ofnew millionaires in the emerging economies and the aging population looking forconvenient property for retirement purpose.

Nevertheless, such development may also be short-lived, cyclical, or evenspeculation driven. For instance, California experienced rebounding prices in 2009and 2010, only to see them decreased again in 2011. Denmark, whose realestate bubble burst and house prices dropped by almost 20% in 2008, also sawa sudden spike in prices in 2011 before the downward spiral began. It is commonsense that any shock to the economy, originating either internally or externaly,can cause fluctuations or volatility in economic activities.

3.3 Building Appropriate Bubble Indicators

In order to identify the signs of property bubbles, economists have developeda number of financial ratios and economic indicators to assess whether propertiesin a given area are fairly valued. To come up with an educated guess on whethera real estate market is having a bubble, current indicator levels are comparedwith the levels that have proven unsustainable in the past (i.e., have led to, orat least accompanied, crashes). In this regard, the indicators that are useful indescribing the two interwoven aspects of housing bubble are: (a) Valuationcomponent and (b) Debt (or leverage) component. The valuation componentmeasures how expensive houses are relative to what most common people canafford. Meanwhile, the debt component measures how indebted householdsbecome after buying a home, and also how much are banks’ exposure to mortgageand household debts. However, we also need to be alert to the factors that drivehousing prices, particularly the factors that tend to be inconsistent with the demandand supply fundamentals, as falling housing prices tend to result in higher ratesof mortgage delinquency (non-performing loans).

Sukada and Santoso (2009) analysed the threat of both household credit tofinancial stability by using the balance sheet approach, in particular, by assessinghousehold’s maturity mismatches and solvency problems. These two types ofproblems are considered to be relevant to households.

According to Holt (2009), the major causes of property bubble that can leadto financial crisis are: (i) Low short-term interest rates; (ii) Low housing loan/

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mortgage rates; (iii) Irrational exuberance that the property prices would nevergo down; and (iv) Relaxed standards for mortgage loans. In the same vein, theIMF cited that the likelihood of a housing crisis happening depends on whetherthe housing boom resulted from a deterioration of lending standards and thedegree of leverage. Household leverage and ease of credit may fuel a strongmortgage credit growth (IMF GFSR, April 2011). The IMF also found that thereare correlations between housing prices and mortgage credit growth. During theboom, stronger mortgage growth (as measured by the ratio of mortgage debtto GDP) may result in faster house price increase. In addition, the relationshipbetween house price growth and mortgage credit growth works conversely, inthat mortgage credit growth is also boosted by house price increases due tohigher household wealth and expectations of further house price increases.Empirical analysis by the IMF on advanced countries has shown that, on average,a 10% increase in household credit is associated with about 6% in house prices.

Graph 7Relation between Household Credit & Housing Price

With regard to the relaxed standard for mortgage loans, the US subprimecrisis is clear evidence of how loosening credit requirement is extremely riskyto the economy. During the decades prior to the development of the housingbubble, the standards for mortgage loans in the United States were fairlyconsistent. Most mortgages were 30-year fixed rate loans, requiring a downpayment of at least 20% of the loan, or mortgage insurance if the 20% downpayment requirement was not met. The borrowers also had to present underlyingproof that their income was sufficient to ensure that the monthly mortgagepayments would be affordable. But, in the mid-1990s new governmental policieswere enacted that contributed to relaxing the mortgage loan standards.Furthermore, in 1995, the Community Reinvestment Act was modified pushingbanks to increase their mortgage lending to lower-income households and resultedin the relaxation of mortgage lending standards by many banks.

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Empirical studies by the IMF suggested that the type of interest rate beingused in the mortgage market may affect mortgage growth as well. The use ofvariable-rate loans amplifies mortgage credit growth. While variable rate loansexpose borrowers to interest rate risk and the banks to credit risk when interestrates go up, the lower variable rates relative to fixed rates may tempt myopicborrowers to take on excessive credit.

3.4 Indonesia’s Case

Based on the BI Property Survey in 2006, the modalities of Indonesianhouse purchase include using bank loan (77.23%), using short installment (14.13%)and in cash (8.64%). Of that total bank loan, 75.57% was via commercial scheme(non-subsidised) and the remaining (24.43%) was under subsidised scheme.

Table 3Payment Scheme Used To Buy

Residential House

Graph 8

Meanwhile, the main factors that affected people in applying property loansare interest rates, earnings, and the size of the down payment.

The BI study in 2011 revealed that there is a positive corelation betweenthe growth of housing loan and growth of property price. The movement ofHousing Loan Growth and the Residential Property Price Index (RPPI) isrelatively in line.

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The indication of factors that may trigger property bubble in Indonesia canbe seen particularly in the form of low short-term interest rates and irrationalexuberance, whereas the standards for mortgage loans are still prudent andbanks’ housing loan/mortgage rates are still relatively higher than the rates inother countries.

In Indonesia, banks usually offer Adjustable Rate Mortgages (ARM) schemeto attract more house buyers. Under such a scheme, banks give lower and fixhousing loan interest rate for specific time, for example, the first two years ofthe mortgage contract. Afterwards, the rate is adjusted to a floating rate. Suchinitial lower fix rate could provide house buyers with a lower and relativelyaffordable monthly payment during the first two years. Nevertheless, when thefixed rate period is over, and the interest rate and mortgage installments areadjusted upward, debtors with insufficient payment capacity may find difficultiesin fulfilling their obligation.

The low short-term interest rates (ARM scheme) contributed to the increasinghousing price in two primary ways. First, the scheme encourages the practiceof leveraging (investing with borrowed money). With short-term interest ratesextremely low, investors can increase their returns by borrowing at low short-term interest rates and investing in higher yielding long-term investments, suchas mortgage-backed securities. Such practice of leveraging then increases thefinancing availability for mortgage lending, and thus contributed to rising homeprices. Second, as the scheme provides relatively affordable monthly paymentduring the first years, it can attract and acquire a wider range of customers andtherefore increase housing demand. With higher demand, housing price will riseas well.

Graph 9

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Irrational exuberance that the property prices will never go down is alsovisible in Indonesia’s property market. BI’s survey shows that people tend toinvest in property instead of other investment alternatives, such as gold andother financial market instruments. Investors continue to buy property at anyprice, motivated by the expectation and belief that property prices will continueto rise in the future. Such behaviour may push price higher and trigger a housingbubble. When the rising house price turn into a housing bubble and eventuallyburst followed by home price drop, the impact on the economy may be augmentedby the degree of leverage in the economy. In Indonesia, these possibilities needto be explored further in order to identify the magnitude of the related risk andvulnerabilities.

4. Mortgage Finance and Consumer Credit: Implication on FinancialStability

It is hard to predict when a property bubble is going to burst. Indonesiadoes not have any experience related to it. However, based on past experiencesof other countries, there are some developments in the Indonesian propertysectors that are similar to some indicators that are considered as major causesof a property bubble.

In Indonesia, the rapid growth of housing loan/mortgages is followed by ahigh increase in the Residential Property Price Index (RPPI) in the majority ofthe surveyed regions. In Q1 2013, the RPPI was 11.2 % (yoy) cumulatively.This index reflected the highest growth increase since the inception of the survey.In Q1 2013, the growth of property prices surpassed the growth of the GDP/capita. If this condition continues, it can render housing price unaffordable.

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Graph 10

Graph 11Residential Property Price Index in Several Areas

Even though as the national RPPI Q1 2013 grew 11.2% (yoy), based onthe BI survey, higher RPPI growth occured in many areas, even in outer JavaIsland, areas remote from Jakarta, such as in Makassar, Pontianak, Medan andDenpasar.

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For housing projects, a rise in property prices for a unit of the same typevaries across locations. In South Jakarta, it reached 45% /year; in Tangerang,it reached 28% /year; in East Jakarta, it was 27% /year; and in Cileungsi area,it was 17% /year. In Semarang-Central Java, the increase in property price wasbetween 7%-40 % /year; and in Bandung-West Java, it reached 9%-78 % /year.

In Indonesia, residential property is classified according to its building size.There are three main catagories: Large (>70m2); Medium (22-70m2); and Small(<22m2). Each type consists of landed house and apartment. Besides the abovecategories, there are semi-commercial buildings, such as housing stores andhousing offices. These are buildings designed for residential cum store or officeuse.

In April 2013, the largest share of housing loans was the landed house type22-70m2 loan (41.5%) followed by landed house loan type > 70 (37.4%). Bygrowth, the growth of apartment loans was the highest. Apartment type < 22loan grew 118.6% (yoy), apartment type 22-70 loan grew 83.8% (yoy) andapartment type >70 loan grew 71.4% (yoy). The BI survey also revealed that5% of the respondents use multi-purpose loans to purchase properties. Multi-purpose loan is a facility for an individual customer who wants to fulfill his variousneeds with a certain collateral, usually property and salary base. Another typeof multi-purpose loan does not require the borrower to provide any guarantee,but the interest charged is higher than ordinary loans.

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The share of mortgages is still dominated by banks with total share of morethan 99.7%. Another source of fund for mortgages are Rural Bank and MultiFinance Company. However, the shares of both institutions are still very small.Secondary financing by PT Sarana Multigriya Financial Tbk (SMF) is alsorelatively small. Cumulatively, the total outstanding balance of financing channelledby the company reached Rp 8.5 trillion.

Table 4Outstanding/Share of Housing Loans/Mortgages

Table 5Mortgage Financing by Bank, Rural Bank & Multi-Finance

Companies (as of Dec. ’12)

Bank mortgage is the main source of home purchasing by consumers bothfor the primary and secondary market. On the other hand, developers mostlyuse their own funds to build the property. In the secondary market, medium sizeresidential property dominated the market with share of around 61.8% andfollowed by large residential property.

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4.1 Speculative Behaviour in Indonesian Property Market

BI detected the ocurrence of bulk property purchase, whereby a customerpuchases more than one unit of property, even more than 10 units at a time,either using a mortgage or cash/short installment. The central bank debtorinformation system revealed that there were 35,298 debtors who own more thanone mortgage at the same time, with total mortgage outstanding at Rp 31.8trillion (accounting for 12.4% of the total mortgage loans in April 2013). Mostof these debtors (70%) have outstanding mortgage loan below Rp750 million,with mortgage tenors ranging from 6 to 10 years, and the average mortgageinterest rates below 10%, with total outstanding at Rp 6 trillion. Note: Not includingbulk (more than one) property purchase tied in one credit agreement.

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Table 6Number of Debtor Having More Than More

Housing Loan/Mortgage Facilities

Around 50% of the debtors with more than one mortgage loan took thefacilities within the last 3 years. The trend of a customer taking more than onemortgage appears to be rising since 2010.

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4.2 Demand for Property Will Remain High

Besides for residential purpose, the high demand for property is also drivenby investment/speculation due to expectations of rising property prices. The BIsurvey in June 2013 revealed that in the last one year 42.5% of the respondentschose to invest/buy property in comparison to gold, stocks/mutual funds anddeposits. Demand for property in one year ahead is also forecasted to remainstrong. 64% of the respondents chose to invest in property instead of otheroptions. The same survey also revealed that not all of the first mortgages areused for residential purpose. 13.9% of the respondents said that they use theirfirst mortgage to buy property as an investment instrument or for rent. 65% ofsecond mortgages are used for investment and 100% of third mortgages areused for investment. Therefore, it is clear that the more property is owned, themore likely it is used as an investment/speculation instrument. 81.1% of therespondents stated that the reason for buying a property is the expectations ofits rising price.

Table 7Number of Debtors With More Than One Housing Loan/ Mortgage

Facilities Since 2010

Table 8Investment Options

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The BI consumer survey9 revealed that the average Indonesian Debt ServiceRatio (DSR)10 is relatively low, i.e., 15%. The Indonesian household uses mostof its revenues for basic necessities (65%). Only about 15% of the revenue isused to pay financial obligations (including mortgage and other loans) and stillhas 20% of its revenues to be kept as a savings. The DSR of 15% is still lowerthan Indonesia’s banking requirements that range from 30% to 40%11. Thissituation indicates that the household sector in Indonesia is still prudent in managingits finances and still have the capacity to increase its loan.

Table 9Usage of Property #1, #2, #3

Table 10Reason for Choosing Property as an Investment Instrument

________________9. Based on consumer surveys in 30 cities by BI Statistic Department.10. Debt CService Ratio = the ratio of principal and interest payment compared to income)11. BI survey on June 2013.

Table 11Average Percentage of Household Income Usage

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With such characteristics, the demand for housing is predicted will continueto increase. This behaviour is feared will drive housing price increase. Theincreasing price needs to be controlled to maintain financial stability. A moretargeted policy response needs to be taken to slow down the growth, particularlyfor the debtors who have more than one mortgage. Along with that, othermeasures such as financial market deepening can provide people with investmentalternatives.

4.3 Policy Response Regarding High Increasing Property Price in ManyCountries

In general, the response to a rise in property prices in many countries is byimplementing policy targeting on mortgage growth, tax, or combination of bothmeasures. The often taken policy measures, among others, are: (i) Loan ToValue; (ii) the Stamp Duty (Taxation); (iii) Debt Service Ratio; and (iv) adjustmenton Right Weighted Asset. The existence of speculative behaviours in the propertymarket has become one of the biggest concerns of the authorities in thecomparison countries. It is indicated by the adoption of: (i) Policies that imposedadditional tax on property sale and purchase under certain periods (holdingperiods); and (ii) A distinction in LTV levels in areas that are prone to speculativebehaviour.

Based on current discussions with several property consultants, the Indonesianproperty sector is described among others as follows: From the supply side, in2013, it is estimated there will be increased supply of residential property sincedevelopers have postponed launching several residential projects in 2012. Followingthe delays, the residential property supply is expected to increase in 2013. Interms of house prices, it is estimated that residential property prices will continueto experience an increase in 2013. This prediction is supported by the historicaltrend of land prices increasing which has occurred in the year 2012 by 28%(yoy). Several locations with high residential property increase are indicated asovervalued, but not bubble. Overvaluation occurs in the primary market due todevelopers’ marketing gimmick. Overvaluation is usually characterised by highprice spreads (generally greater than 20%) between property prices in the primaryand secondary markets. In turn, this situation can cause a decrease in propertyprices.

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Meeting with several mortgage lender banks in order to solicit input regardingthe current property sector condition, yielded the following findings:

• In general, the banks said that the previous LTV provision was in effect anearly enactment. However, after a few months, mortgage applications wereback to normal.

• There was a bank stating when it finances residential properties in certainareas that are considered to have a high price rise, the bank imposes lowerLTV provisions. This stance actually can only be practised by large bankswhich have relatively high competitive advantage. However, there are alsoseveral banks which said that in conditions of intense competition, if bankdoes not provide good services and facilities to the borrowers, the bankswill lose their competitiveness.

In short, we can find some behaviours in Indonesia that need to be givenmore attention, such as:

• Banks need to consider its debtor payment capacity when interest rates onthe mortgages are adjusted upward (typically after two years). The highermortgage payments can lead to unmanageable repayment when the debtorsdo not have sufficient capability. Banks also need to take into account someshocks that can lower debtors’ income in the future.

• The belief in Indonesian society that the property bubble will not occur andprices will not come down can be concluded from the above survey wherepeople tend to invest in property rather than in other alternatives, such asgold and other financial instruments. Another fact is that there are manyborrowers taking out housing loans/mortgages to invest in property. Someof them even have more than nine housing loans/mortgages at the sametime.

• Another indicator that needs more attention is the fact that the growth ofproperty price already exceed the growth of GDP/capita. This can be ameasure as to how expensive houses are relative to what most people canafford.

However, the findings indicating that Indonesian households are less indebted,still have room to save, growth of the middle class, growth of the youngergeneration and soundness of banks in Indonesia give much hope that the propertysector in Indonesia can be properly managed. Nevertheless, this does not imply

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that BI does not have to do anything regarding the current development in theproperty sector. Since the majority (99%) of housing loan/mortgage lenders arecommercial banks, one of the most crucial tasks that should be addressed is theenhancement of the banks’ prudential standards for mortgage loans.

In Indonesia, the BI has issued the following regulations covering the propertysector:

a. Circular Letter No. 30/2/UK and SK Dir No. 30/46/KEP/DIR dated 7 July1997 concerning Restrictions on the Credit Granting by Commercial Banksfor Land Procurement and/or Tilling Financing.

With the regulations, banks are prohibited from giving direct/indirect creditto developers to support land procurement and/or tilling as well as purchaseand/or guarantee securities issued by developer companies for landprocurement and/or tilling. The ban is excluded for purchasing/lending credit/underwriting securities from developer companies intending to procure lendfor construction of simple houses/apartments for low-income folks, shop/traditional market and highway development.

b. Circular Letter No. 13/6/DPNP dated 18 February 2011 concerning Guidelinesof Risk Weighted Asset (RWA) Calculations for Credit Risk UsingStandardised Approach. RWA for mortgage-backed security for Houses:35% when maximum Loan-to-Value (LTV) is 70%; 40% if the maximumLTV is 70% - 80%; 45% when LTV 80% - 95%; Credit risk weights forcommercial-property-backed security is 100%.

c. Circular Letter No. 14/10/DPNP dated 15 March 2012 concerning theImplementation of Risk Management at Banks that Lend Housing and AutoLoan. LTVof Housing Loan for residential property type > 70 m2 maximumis 70%. The regulation is exempted for housing loan to finance property ofbuilding size <70m2 and all govermennt housing programmes.

Maximum LTV regulation for housing loan type > 70m2 has been in forcesince 15 June 2012. However, the growth of housing loan type > 70m2 and loanfor apartment type > 70m2 remain high, each type reaching 45.1% and 71.4%in April 2013. This high housing/apartment loan growth was coupled by a highrise in the RPPI index. The increasing price was driven by high demand forhousing, either for residential purpose or for investment. The central bank foundthat there are many borrowers using bank credit to purchase more than oneproperty at the same time. This issue is a cause for concern as it can become

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a trigger for financial instability in the event of a spike in defaults. Therefore,a policy is needed to control property purchases, especially property purchasesthat are not used to fulfill basic needs.

In view of these facts, BI pays more attention to those banks that maylower prudential standard to be competitive in this market. The possibility ofsuch a situation happening is one of the considerations that warrant the introductionof certain minimum standards. BI hopes that there will be no bank that is tooaggressive, lowering its prudential standard to exist in the mortgage market.

In the longer term, BI needs to coordinate with the government, in this casethe tax authority, especially to dampen property speculation using cash/shortinstallment. This step is needed since BI provisions can only affect propertydemand that use credits, but not effective to influence the property purchasesusing cash/short installment. Usually, property investors/speculators purchaseproperty in large quantities, hold them for a while and then re-sell them for aprofit. This action drives the property price upward rapidly. Additional taxesrelated to the duration of the property’s buying and reselling period (holdingperiod) hopefully can influence property demand that is indicated as speculation.

4.4 Stress Test

In Indonesia, there are 120 commercial banks of which 109 disburse housingloans/mortgages. The top ten banks with the biggest housing loans/mortgagesoutstanding have a combined share of 83% of the total national housing loans/mortgages outstanding.

Property credit consists of housing loans/ mortgages, construction loans andreal estate loans. In April 2013, total Non-Performing Loans (NPL) of propertycredit was 2.31%, contain NPL of housings loan/mortgages was 2.4%, NPL ofreal estate loans was 0.68% and NPL of construction loans was 3.52%. Besidesof the credit, NPL of multi-purpose loans was 0.98%.

The Department of Statistics-Bank Indonesia survey on May 2013 revealedthat 5% of the respondents having multi-purpose loans use them to purchaseproperty. The largest multi-purpose credit utilisation are for business workingcapital (32.8% respondents), house renovation (29.2% respondents) andeducational fees (15.2% respondents). Thus, the stress test on property credittook into account all the credit related to property such as housing loans/mortgages, construction loans, real estate loans and certain percentage of multi-purpose loans.

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Assuming the default of property credit increase to 10%, several banks willhave NPL of more than 5%12 but no bank will have a Capital Adequacy Ratio(CAR) under 8%13. Based on this stress test result, to maintain financial stability,it is important to enhance bank prudential standard to avoid higher risk on veryfast growing property price, especially when the mortgages is used to financethe second, third or more properties.

5. Policy Recommendations

Considering all the facts related to the property sector development, it canbe concluded that in general banking credit related to property is still at amanageble level in Indonesia. However, the high growth of mortgage loans,rapid increase in house price and the motivation of people to use property forinvestment/speculation need to be addressed in the early stages so that thesymptoms will not lead to an unwanted situation.

The Indonesian demographic characteristics make up of a growing youngergeneration and expanding middle class and coupled with continuing stableeconomic growth, it can be predicted that property demand, especially residentialproperty, will increase. Considering the fact that there is a backlog in the propertysupply, property price will undoubtedly rise. However, people need to be morecautious when faced with rising property price that does not adequately reflectsound fundamentals. If all the parties are of the view that the property price willnever go down, then the vulnerabilities will actually materialise. Due to intensecompetition, banks struggling for a share in the mortgage market may lowertheir prudential standard to survive. Enhancing prudential regulation is one methodby which the central bank can maintain financial stability amidst a very highgrowth property sector.

________________12. Threshold of NPL for bank is 5%. When the NPL is above 5% , the bank is considered

to need more attention and below 5% is acceptable.13. Minimum Capital Adequacy Ratio (CAR) for banks in Indonesia is 8%.

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Some regulation is needed to enhance the prudential standard of the financialsector. The new regulations are as follows:

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All the above LTV regulation is exempted for government housing programmeand/or mortgage that receives government subsidies. With this adjustment:

• Multi-purpose credit, as a consumption credit that often use property as acollateral, will be included in the LTV regulation. BI’s monitoring has revealedthat the credit has the largest proportion of consumption credit, and is showinga high growth over the past few years.

• Productive credit, such as Investment Credit and Working Capital Creditwhich often have property (land and building) as collateral, will be excludedfrom the LTV provisions.

Thus, the advanced settings of LTV/FTV regulation require all banks toapply equal administrative terms for mortgages, treatment for husband and wifedebtor, the arrangements for additional credit/financing based on properties thatare still being used as collateral for mortgage facilities (top-up credit),arrangements for consumption credit/financing backed by properties, andrestrictions for banks to provide additional credit/financing for the fulfillment ofthe advanced payment of property purchasing. Policy that imposes lower LTV/FTV for the second, third, or more properties are also intended to provideopportunities with the lighter requirements for people who need to acquire ahome for the first time than for parties who apply for second or more mortgagefacilities. In addition, the provisions are also intended to enhance consumerprotection by requiring that second or more mortgage facilities are not allowedto be used to finance the purchase of a property that has not been built or isin a development stage. This provision will prevent anybody from using bankingcredit to buy more than one property unit for any purpose, including speculation,when the property has not been built completely. While the first mortgage is still

Table 12Proposed Adjustment Value to Previous LTV Regulation

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permitted for purchase of a property that has not been built completely, someregulation is required to cover bank’s relationship with developers.

Besides the enforcement of above regulation by the central bank, coordinationwith the fiscal authority is needed to deal with property buyers using cash sincethe LTV regulation cannot influence this categeory of property buyers.

5.1 Additional Taxes Related to the Holding Periods

To maintain financial stability, the central bank needs to coordinate with thegovernment, especially the fiscal authority, in setting a holding-period regulationassociated with an additional tax when there is a sale of the property within acertain period after the purchase. This kind of action (buying properties usuallyin multiple units, then selling them for a gain in short periods) is able to boostproperty price and often makes the real property consumer pay a higher pricefor property they need. To minimise this activity, an additional tax is proposedto be imposed when the residential property is sold within 4 years of its purchasedate. The quicker a property is purchased and resold, the higher the additionaltax or, in the other words, the additional tax will be higher when the holdingperiod is shorter. The principle of the additional taxes is to discourage peopleintending to sell the property in order to gain margin in quick time after purchaseusing cash/short installment as a payment method. Thus, the value of the additionaltax that will be imposed must take into account the level of profitability obtained.The expected result is to limit the activity of property speculators expecting arise in property prices.This measure also able to address every parties that conductproperty speculation without using banking credit. As an illustration, the Table13 below describes the proposal of an additional tax regulation that is relatedto the holding period.

Table 13Holding Periods Related to Additional Tax of Property Selling

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6. Conclusion

• The share of consumer credit in Indonesia has been increasing. The shareaccelerated from 21.6% in 2002 to 29.5% in 2012. Housing loans, autoloans and multi-purpose loans have been among the biggest components ofconsumer credit in Indonesia.

• In March 2012, BI issued a regulation regarding maximum LTV for housingloans with building size > 70m2 (large size) and minimum down payment forauto loans to address the high growth in housing loans and automotive loans.This action is a deployment of the countercyclical approach which enforcestighter regulation during periods of high credit growth. The objective of thisregulation is to improve bank prudential in providing housing loans and autoloans. As a result, auto loans have been decreasing and the nominal NPLis declining, but the housing loan growth was only sluggish temporarily. Afterseveral months, the growth increased and, as of April 2013, the loan growthof housing type > 70m2 remains high.

• In April 2013, the growth of housing loan was around 45.1% for landedhouse type > 70m2 and was 71.4% for apartment type > 70m2 , far abovethe average banking credit that grew at 21.9%. This housing loan type >70m2 growth was accompanied by soaring price of house in many cities inIndonesia. In several areas the rise was so high, arround 30% - 45%, evenmore than 70% yoy. This soaring price increase is worrisome as it willinfluence other types of property price, especially property for the low-middle income population catering for their their primary need, to beunaffordable. This situation becomes a concern since the biggest backloglies in this housing type. Besides that, a fast growing property price willmade people apply for much more credit. This means the banks will beexposed to higher risk when the increasing property price is excessive.

• It is hard to predict when a property bubble is going to burst. Moreover,Indonesia does not have any experience related to it. However, from thelessons of experience learned from others countries, the major causes ofproperty bubble that can lead to financial crisis are as follows: (i) Lowshort-term interest rates; (ii) Low housing loan/mortgage rates (iii) Irrationalexuberance; and (iv) Relaxed standards for mortgage loans. Some of thesigns such as irrational exuberance are already happening in Indonesia.Nowadays, property is the most preferred instument as investment tool.The belief that the property price will always increase is the most reasonwhy people choose to invest in property. The central bank also identified

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an increasing preference by borrowers to use bank loans to buy more thanone property. In April 2013, the number of debtors who have more than onehousing loan facility is around 35,000 persons or about 5.1% of the totalhousing loan debtors owing an outstanding 12.4% of the total housing loanoutstanding. Around 3,000 of 35,000 debtors have 3-6 housing loans andalmost 1,000 of 35,000 debtors have 6-9 housing loans. The number ofdebtors which have more than one housing loan from year to year is on theincrease. With the above trend, the housing loan demand is predicted to goup.

• As of end-2012, Indonesia’s mortgages/GDP was relatively low around 2.7%.The share of mortgage to total banks’ credit is also relatively low around9.1% (April 2013). If we take into account all the credit related to property,such as construction credit and real estate credit, then the property creditin April 2013 was around 13.4%. The average household’s Debt ServiceRatio (DSR) also is still at a safe level. In 2013 (data up to April 2013) theIndonesian household DSR was around 15%. This DSR ratio is far belowthe bank DSR standard that usualy fall between 30% - 40%. Moreover, thehouseholds still can keep 20% of their income as a savings. This means thatthe households in Indonesia still have the capacity to take on more bankloans.

• Considering inter-bank competition to attract clients, stress test result andthe vulnerabilities that may occur from uncontrolled housing loan growth,the only way to maintain financial stability is by evaluating the relatedprovisions and enhancing banks’ prudential standard. Most people are inneed of housing loans for residential purpose while there are some peoplewho take housing loans to invest in properties. Therefore, more targetedprovisions are needed to address this current situation to discourage thepeople who take more than one housing loan, but still accommodate thepeople who genuinely need to take housing loan for a primary need. Sincethe majority (99%) of the housing loan/mortgage lenders are commercialbanks, central bank regulation can hopefully influence the mortgage growth.

• BI awares that there are many people who buy properties using their owncash. This category of buyers often use propety as their investment/speculation instrument by acquiring property in advance, often in multipleunits even before their construction, and then sell the property units theyown in a short period. This practice can cause the property price to overshootand this behaviour can be find in many places. That is why it is easy to findunoccupied properties in almost every residential location. To deal with this

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kind of behaviour, BI needs to coordinate with the fiscal authority to explorethe possibility of imposing additional tax or duty on properties that are boughtand sold within a certain period of time.

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