I'm feelin' okay this mornin'
And you know
We're on a road to paradise
Here we go, here we go
~ Talking Heads

Jakarta’s Jalan Casablanca is not nearly as exotic as its name might suggest - but it is one of the city’s safest streets. Not that its users don’t want to drive like maniacs – they most certainly do – but that the seemingly endless traffic congestion has reduced vehicle speeds to such a crawl that you can drive whilst texting or reading a book and still have plenty of time to brake and avoid hitting whatever is in front of you.

It’s in this maelstrom of collective madness that I notice a ramp to an elevated roadway ahead of me. It’s not blocked off but the cars seem to know that the road is off limits. I cycle up it.





Work on the elevated road – which runs for much of the length of Jalan Casablanca linking Kampung Melayu in East Jakarta to Tanah Abang in Central Jakarta - started a few years ago.

But while two of the three main sections of the road were eventually completed – more or less – one of them was not. And with huge concrete blocks still missing the contractor left the job unfinished. Walked away. Just like that! Insane - even by Jakarta’s wacky standards - although by no means without precedent (the half-baked attempt at building an MRT etc).

The unfinished section is the most ambitious of the three and huge pillars are needed to support the road as it soars high over Jalan Sudirman below it.

So why has this section not been finished? Defending itself, the constructor claims it hasn’t been paid.

But on the other side, the city administration counters that the project should have been finished by the end of 2012 and it will need to conduct an audit before it can release any funds in 2013.

Digging a bit deeper and I discover that the contractor (Istaka Karya) has had a deeply troubled past and should, theoretically at least, have been declared bankrupt in 2011 with calculated assets of Rp 120 billion but debts of Rp 1.19 trillion.

After cycling along the first two sections of the elevated road I come to the Istaka Karya section where a huge gap lies in front of me.

I pause for breath before heading back. Hold on a sec. Have those two sections been built at a different height?!!!! 

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Jakarta house prices are going through the roof – at least metaphorically speaking that is – and a moderate-sized family home will probably set you back at least Rp3 billion.

Prices are much higher, of course, in the city’s posh areas like Menteng, Kemang and Pondok Indah, where many decent houses sell for above an astonishing Rp20 billion – a price level unimaginable only a few years ago.

Apartments are blossoming and selling quickly despite eye-popping selling prices of above Rp25 million per square meter for the upper segment.

Land is scare and the economy is red-hot. And people have money - legitimately obtained or otherwise. But memories are short (1997/98 anyone?) and bubbles are never seen – at least until one blows up in your face, leaving you disconcerted and distraught, wondering why it all went so horribly wrong.

Whilst noone can accurately predict a property bubble (of course it’s easy to do in hindsight) there are some common factors which have empirically been associated with property bubbles. So how does Jakarta measure up? Well…

1) House prices. Sharp increases in house prices can indicate a bubble. But not always. There are many good reasons for house prices to go up – just ask anyone in HK, London or NY. But how much have Jakarta’s property prices gone up, anyway? Well, according to a Bank Indonesia property residential survey (download here, right click save as), prices of residential property in Jakarta have surprisingly gone up by only 5.5 percent per year on average between 2002 and 2013 (2002: index of 100, 1Q13: index of 171.62). This is a relatively modest increase and pretty much in line with overall inflation I’d say. More recently, prices have accelerated a bit and in the fourth quarter of 2012 prices of residential property in Jakarta rose 6.80% year on year.

2. Affordability
A better indication of a bubble is affordability. If people can’t afford houses, they can’t buy them. Simple as. A cursory look at economic data shows that incomes have increased significantly as the economy has grown. But it’s difficult to get data for just Jakarta. Even so, a rule of thumb suggests that house prices are unaffordable when they reach or surpass five times the buyer’s annual income. So assuming a middle class buyer in Jakarta has net income of Rp200 million a year, that means they would therefore only be able to afford property below the Rp1 billion level. And that’s not easy at the moment with many “average’ houses selling at much higher prices than that.

3. Interest rates
Most people borrow money to buy a house. If rates are low - like now – property is more affordable.

4. Lending criteria
Weak lending standards can spell problems down the road. BI did impose a 30% LVR rule but it applies to larger properties. For smaller properties, including apartments, the down payment can be as little as Rp5 million. And sometimes you can even pay the downpayment in installments! Speculators are also big buyers of property in Jakarta. They make money by flipping the apartments – buying them from the developer and hoping to sell them on later at higher prices. Great while the game works but if not…

5. Default/repossessions
Thanks to a strong economy this is not a problem at the moment. Noone buys a property to have it repossessed by a bank. No problem here. As long as the economy stays strong. And what could possibly go wrong there? Inflation, politics (elections), capital outflows…

Conclusion. Prices are getting unaffordable for many but the strong economy keeps the property bandwagon on a relentless rise. Much of the money – and most of the people – are in horrendously overcrowded Jakarta, so it’s perfectly reasonable to expect very high prices (just like in many other capital cities). Just don’t ask who is buying those Rp20 billion houses. Oh yeah – and that bit I said about a bubble? Like you never see it? Until it bursts!

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