Property Sector a Bright Spot in Indonesia’s Slowing Economy

As macroeconomic uncertainties and elevated inflation levels cast a pall on Indonesia’s growth outlook this year, the property sector is increasingly shaping up as a bright spot and a pillar of support for the slowing economy.  

Risks of a global recession, coupled with monetary tightening policies adopted by many central banks including Bank Indonesia (BI), are likely to dampen Indonesia’s GDP growth, which could slow to 4.4 percent in 2023 from about 5.3percent last year.

But the property sector is expected to support Indonesia’s economy, helped by the state’s housing financing stimulus aid as well as further infrastructure development, according to Indonesia’s Public Works and Public Housing ministry.  

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Home buyer confidence

While rising benchmark interest rates – which BI raised to 5.25 percent in November 2022 – will likely lead to higher mortgage rates in2023, housing demand has held up relatively well.

Most consumers are confident enough to spend more to get higher-quality housing, noted Marine Novita, Country Manager of Indonesian property portal Rumah.com. This was reflected in the positive trend of the demand index for residential properties, which rose to 9 percent on an annual basis in the fourth quarter, compared to the third quarter.

Home buyers’ optimism and purchasing power can also be seen from online housing search trends: searches for upper-middle class properties with prices exceeding IDR 1billion account for 56 percent of total searches on Rumah.com.

These positive signs contrast sharply with the property market slump in 2020 following the COVID-19 outbreak, which caused lockdowns and pushed the economy into a recession.

A relatively mild slowdown

This year, Indonesia’s economy has been relatively decoupled from the slowdown in the United States, its major trading partner, and shielded from the record high energy costs caused by the Russian-Ukraine conflict.

As a major producer of commodities such as palm oil and coal, Indonesia’s exports have held up well and its central bank has been managing its exchange rate to limit the negative fallout from a strengthening US dollar. Thus, while Indonesia’s economy will slow this year, it will not repeat the sharp downturn of 2020.

Meanwhile, the property sector’s 2023 outlook is supported by domestic drivers such as the government’s stimulus plan, which includes easing down payments for property ownership loans to zero percent and concessions for value-added taxes of up to50 percent.

Still, there are risks to Indonesia’s property sector. The central bank aims to keep inflation rates below 6 percent this year, but it is unclear whether household incomes can keep up with this increase.

If consumers’ purchasing power declines too much, this could dampen domestic consumption –which makes up more than half of GDP – and in turn lead to slowing growth in the housing sector. Total home and apartment ownership loans could then grow by 7 percent in 2023, slightly lower than the 7.3 percent in 2022.

The office and retail sector, which had been recovering well in 2022 after a sharp decline during the pandemic, could also be impacted. Jakarta’s Central Business District offices, for instance, had seen a net absorption of office space of about 100,000 sqm in2022. With tenants turning cautious in anticipation of a global slowdown, vacancies in the CBD could spike?, especially with the completion of new large office projects this year.

Broader growth trends

Indonesia’s pledge to provide more affordable housing for its 275 million people – of whom 26 percent are millennials – and its rapid development of infrastructure will also continue to support the property market this year and beyond.

The expansion of roads and public transportation lines are creating new strategic locations that will expand choices for homebuyers and further stimulate demand.

Meanwhile, Indonesia’s rapid urbanisation continues to drive demand for new housing as well as retail and commercial properties in the cities – there is currently a backlog of 12.7 million housing units, according to some estimates.

All these developments and trends are attracting more investments.  

For foreign developers and investors looking for opportunities in Indonesia, the recently-introduced "second-home visa" aimed at drawing billionaires and global talent could offer a sweetener.

Strong sentiment

While macroeconomic uncertainties have clouded the global economic outlook, Indonesian consumers remain relatively upbeat.

This was reflected in the 3.5 percent rise in Rumah.com’s Indonesia Consumer Sentiment Index in the second half of 2022 compared to the first half. Respondents to Rumah’s survey expressed high satisfaction with the national property climate, which was characterised by a good long-term outlook (57 percent of respondents), property prices that were in line with expectations (47 percent) and a variety of financing options (34 percent).

All this bodes well for the property market’s prospects, as well as for local and foreign developers who maintain strong balance sheets to position for an even more meaningful recovery as inflation levels gradually retreat.

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Click here to read more on Indonesia Property Outlook 2023 insights.

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