Natural and man-made disasters stomp Indonesia’s housing market

Indonesia managed to reduce 4Q 2006 inflation to 6% from 16% during the first three quarters. With the house price index registering a 6.6% nominal increase in 2006; house prices rose by 0.5% in real terms.

The minor post-crisis recovery of Indonesia’s real estate market has stalled. The house price index in 2006 was about 50% below its peak 1994 level in real terms.

Asian Crisis and house prices

Property prices in Indonesia were already declining well before the Asian crisis. True, they increased by 3% to 4% between 1996 and 1998 in nominal terms, but this was illusory, because inflation was on average 18% per annum from 1994 to 1998 (peaking at 88.4% in Sept 1998).

So in real terms the residential property price index has suffered an almost continuous decline in real terms since 1994, dramatically accelerating from 1998 to 1999. In the early 2000s, the Indonesian economy stabilized, and inflation was reduced to 3.8% in 2000. Indonesian house price index rose 13.6% in real terms from 1999 to 2003.

However since then, a series of man-made and natural disasters have cut the recovery short. Pushed by rising global oil prices, Indonesia’s consumer price index rose 10.5% in 2005. Corrected for inflation, Indonesia’s house prices actually fell 8.4% in 2005.

Political instability and other disasters

The Asian Crisis fuelled discontent and political rallies as poverty and unemployment rose. President Suharto’s resignation in 1998 after 32 years in power did not quickly bring stability. Jakarta was the scene of many rallies and protests against and for the government.

Ethnic violence erupted in Maluku and East Timor in 1999, Irian Jaya in 2000, and Kalimantan in 2001. There are also ongoing secessionist movements in Aceh.

Bomb attacks in Bali killed 202 people in 2002 and 23 people in 2005. A car bomb in Jakarta killed 14 people in 2003; another car bomb killed nine and injured more than 180 in 2004.

Three more presidents came to power (one impeached due to allegations of corruption and incompetence) before Susilo Bambang Yudhoyono became the first directly-elected president in 2004. Although there are no direct threats to his position, the government must delicately balance secessionists and Muslim extremists.

In 2004, the Asian Tsunami left 168,000 people dead in Aceh and other places in Northern Sumatra. Another 500,000 were left homeless. In July 2006, a tsunami and earthquake struck South Java, leaving nearly 700 people dead, 120 missing, 1,800 injured and 42,639 homeless.

Other disasters such as volcanic eruptions, mud and lava flows, typhoons and severe flooding in Jakarta and other cities also stunted economic development.

Taming inflation

The government’s effort to tame inflation is commendable. However, more reforms are needed to ensure that inflation will remain low and stable.

The revive the housing market, Indonesia’s government must enact several reforms to bring down transaction costs related to property purchases. A study by the Global Property Guide entitled "Housing Sales and Rental Markets in Asia" saw that roundtrip costs in Indonesia are among the highest in Asia. High rental income and value added taxes are also hindering the growth of the real estate market.