Indonesia's house prices more or less steady
Lalaine C. Delmendo | April 01, 2021
During the latest quarter, residential property prices rose by a meagre 0.1% q-o-q (0.26% inflation-adjusted).“Almost all projects decided to not increase their asking prices. Thus, the average asking prices remains the same as 3Q 2020. We hope to see some improvement in the next year,” said Colliers International.
When inflation is taken into consideration, only nine major Indonesian cities recorded house price increases during 2020.
In Jakarta, prices of strata title apartments rose by a minuscule 0.47% during 2020 to an average of IDR 34.96 million (US$2,500) per square metre (sq. m.), according to Colliers International.
Covid has had the expected effect. Residential property sales plummeted by 30.9% from a year earlier in Q3 2020, following y-o-y declines of 25.6% in Q2 and 43.2% in Q1, according to Bank Indonesia. On a quarterly basis, sales increased 7.9% in Q3 2020.
Residential construction activity was paralyzed last year due to pandemic-related restrictions and lockdown measures. During 2020, only 2,698 units were completed in Jakarta, down by 72.4% from the previous year's 9,769 units.
After two decades of uninterrupted growth, Indonesia's economy shrank by 2.07% in 2020, in sharp contrast to its 5% growth in 2019.
To boost economic activity, the government introduced a stimulus package worth IDR 744.28 trillion (US$53.26 billion) last year, including IDR 1.5 trillion (US$107.3 million) funds for the subsidized housing program, which is expected to cover financing for 175,000 new homes. On top of this, Finance Minister Sri MulyaniIndrawati recently announced that the government's COVID-19 recovery budget for 2021 will be expanded further to IDR 619 trillion (US$ 44.4 billion), from the initial budget allocation of IDR 372.3 trillion (US$ 26.7 billion).
The economy is expected to grow between 4.5% and 5.5% this year, according to Indonesia's chief economic minister AirlanggaHartarto. This is slightly more optimistic than the World Bank's recent projection of a 4.4% growth.
Jakarta's rental yields are moderate to attractive
Gross rental yields in Jakarta - the return earned on the purchase price of a rental property, before taxation, vacancy costs, and other costs - are quite attractive, though significantly lower than they were 4-5 years ago. Gross rental yields are an important consideration even for those who do not intend to become landlords, because a high rental yield indicates that the property market is reasonably priced.
Jakarta´s property market now looks well-priced.
Higher end apartments in Jakarta are now priced at around US$ 2,500 to US$2,800 per square metre (sq. m.). Rental yields on these apartments are now around 5.2% to 7.7%.
The disadvantage of buying in Jakarta, for foreigners, is complex legalities and high transaction costs. However, changes in the law are in process which should make things much easier.
Villas on Bali attractively priced at around US$2,000 per sq. m.. On Bali, lower rental yields can be earned, at an average of around 4.0%. As always, it must be stressed that there is a wide range, depending largely on location.
Round trip transaction costs are high in Indonesia. See our Property transaction costs analysis in Indonesia and Property transaction costs in Indonesia, compared to the rest of Asia.
Rental income tax is high in Indonesia
Rental Income: Nonresident individuals' rental income is subject to withholding tax at 20%, which is applied to the gross income.
Capital Gains: Gains derived by nonresident individuals from selling real property are taxed at a flat rate of 5%, which levied on the transaction value.
Inheritance: There is no inheritance tax.
Residents: Residents are taxed on their worldwide income at progressive rates, from 5% to 30%.
Buying costs are very high in Indonesia
The total roundtrip cost of buying and selling a property is between 11.75% and 17.75%.
The buyer pays for the 5% transfer tax, legal fees, and registration fees. The seller pays for the 5% land and building transfer duty (which is different from the transfer tax) and 5% agent’s fee.
Tenancy laws in Indonesia are generally neutral
Indonesian legal institutions are neutral between landlord and tenants.
Rent: Rents are freely negotiable. They are typically paid in advance for the duration of the lease agreement. However tenants are often able to negotiate smaller advance payments, or monthly payments.
Tenant Security: Lease periods typically vary from 1 to 3 years. The terms depend upon the bargaining skills of the tenant and the landlord. Tenants typically have an option to renew.
Indonesia’s economy shrinks for the first time in two decadesAfter two decades of uninterrupted growth, Indonesia’s economy shrank by 2.07% in 2020 from a year earlier, in sharp contrast to a 5% growth in 2019, mainly due to the economic repercussions of the COVID-19 pandemic. Yet on a positive note, this is a fairly modest decline as compared to its regional peers.
Indonesia’s resilience can be attributed to its very domestically-driven economy. It tends to be insulated from global economic trends. In fact in recent years, Indonesia has enjoyed robust growth despite the global crisis. From 2000 to 2019, the economy grew by an average of 5.3% per year, according to the International Monetary Fund (IMF).
To boost economic activity, the government introduced a stimulus package worth IDR 695.2 trillion (US$ 49.8 billion) last year. Recently, Finance Minister Sri MulyaniIndrawati announced that the government’s COVID-19 recovery budget for 2021 will be expanded to IDR 619 trillion (US$ 44.4 billion), from the initial budget allocation of IDR 372.3 trillion (US$ 26.7 billion).
The economy is expected to grow between 4.5% and 5.5% this year, according to Indonesia’s chief economic minister AirlanggaHartarto. This is slightly more optimistic than the World Bank’s recent projection of a 4.4% growth.
“Indonesia’s economic performance continues to show a direction of recovery and is already on the right track,” said the country’s finance ministry. “Going forward, the direction of this recovery will be pushed more quickly, especially with the start of the vaccination in a measured and well-planned manner.”
Unemployment surged to 7.07% in Q3 2020, up from 5.28% a year earlier and the highest level since 2011, according to Statistics Indonesia. Over the same period, the total number of unemployed rose by 37.6% y-o-y to reach 9.77 million people.
In January 2021, overall inflation stood at 1.55%, down from 1.68% in the previous month and well below the central bank’s target range of 2% to 4%. From an average of 9.5% from 2001 to 2008, inflation dropped to an annual average of 4.7% from 2009 to 2019 and further to 2.1% in 2020.
The Indonesia rupiah continues to appreciate, gaining about 12.2% more value against the US dollar since April 2020 to reach an average exchange rate of IDR 14,021.3 = USD 1 in January 2021, thanks to the central bank’s efforts to defend the domestic currency amidst rising current account deficit and global uncertainty. This has more than offset the cumulative 4.4% depreciation in the value of rupiah against the US dollar in 2016 to 2019.
The rupiah is expected to strengthen further against the U.S. dollar this year as foreign investors could pile billions back into the country’s financial market.
“With our fundamentally undervalued exchange rate, large interest rate differential and other positive factors, we continue to believe foreign portfolio inflow will be coming to Indonesia,” said Bank of Indonesia governor Perry Warjiyo.
Indonesia recorded a budget deficit equivalent to 6.1% of GDP in 2020, sharply up from shortfalls of 2.2% of GDP in 2019, 1.8% in 2018, and 2.5% in 2017, and actually the widest in decades, according to the Ministry of Finance. The country’s gross government debt increased to 38.5% of GDP in 2020, up from 30.5% of GDP in 2019, according to the IMF.