Is Jakarta in a property bubble?

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 instalments! 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!