Inflation Will Hit Asian Housing Market

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SLOWLY BUT SURE Asian housing market has now entered its gloomy days. Although it has not been affected by the sub-prime mortgage crisis in the United States, inflation, rising interest rates, hiking food and agricultural products and increasing fuel prices – will slowly but surely hit the Asian housing industry.

Late last month, Global Property Guide released a report on the future of the housing industry in Asia. Entitled Gloomy days ahead for Asia’s housing markets, Global Property Guide disclosed that the Asian market could be still very strong at this time but it cannot easily avoid the housing market crisis triggered by global recession.

Indeed, so far the Asian property market so far has been quite strong and relatively has not been affected by the sub-prime mortgage crisis in the United States. But, the upward trend of inflation, rising interest rates of bank loans – the monetary authority normally raises interest rates to keep inflation down, rising food prices and agricultural commodity prices, and hiking fuel prices, no doubt will trouble the Asian property market.

Even, at the micro level, Global Property Guide observed that households in Asia tend to delay their decision of buying new houses or even cancel their plan of renovating their houses in anticipation uncontrollable price hiking as mentioned above.

Data at the UN Food and Agriculture Organization (FAO) shows that rice – the staple food of the majority of the Asian population – increased by more than 90 percent from end-2007 to March 2008. Surely, this situation has posed a heavy blow to the economy of average Asian families who so far have always suffered easily from rising food prices. Besides rice, also skyrocketing are the prices of other staple food commodities like flour (by 160 percent), soybean oil (104 percent) and sugar (26 percent). Prices of essential commodities are the key component of Consumer Price Index (CPI). Singapore’s CPI is around 28 percent, while in China and India they are 33.2 percent and 50 percent, respectively.

The rising trend of staple commodity prices, according to FAO, World Bank and The International Rice Research Institute will continue until 2009. Except essential commodities, the prices of almost all commodities have increased. Sweet crude oil rose to US$115 per barrel in April 2008, 80 percent higher than the same month of last year. The prices of NYMEX crude oil at this time hover above US$100 per barrel.

Rising Property Prices

The above mentioned rising prices have triggered an increase in property prices in almost all parts of Asia. Property prices in China, Singapore, Philippines, Hong Kong and India have recorded double digit levels in 2007, which contributed to inflation. Normally, the monetary authority will push up interest rates to keep inflation down.

This way, they can increase cash reserves (cash reserve ratio/CRR) at banks. Also, they can sell bonds or other monetary instruments to reduce money supply. The Reserve Bank of India (RBI), for instance, has increased its CRR by 50 percent basis point in two phases in order to keep liquidity and inflation pressures under control. CRR reached an effective level of 7.75 percent on April 26 to May 10, 2008. The RBI and other central banks kept interest rates at stable levels during the first two weeks of April.

But all this will not last long. Analysts say interest rates will start rising in May 2008 if inflation stands above official targets. Global Property Guide disclosed that worries about uncontrollable inflation are quite significant notably in Indonesia and China.

According to Prince Christian Cruz, an economist at Global Property Guide, inflation pressures will no doubt force central banks in Asia to raise interest rates, and this will very strongly disrupt the Asian housing market. Any situation with uncontrollable inflation will very seriously trouble the Asian property market that actually has not fully recovered from the 1997 crisis.

A survey conducted by Global Property Guide disclosed that property prices in Asia are still below the best prices before the crisis. Except a rise by 31 percent on the averaged property price index, property prices in Singapore are still 10-20 percent below the best prices before the crisis. Even in the Philippines, which saw condominium unit prices rising by 15 percent in 2007, property prices are 47 percent below normal levels.

The housing market seems to be still influenced by tight money policies like in China, India, Singapore, Philippines and Thailand where inflation has reached its record levels in the past months. Even, the latest news from Singapore said that area developers had delayed to launch their new property projects in anticipation of the impacts of high inflation that are around the corner at the moment.

Housing market in Jabotabek

Although high inflation looms large in Asia and will have impacts on the housing industry, the Indonesian housing market is still stable. Even, a research conducted by PT Procon Indah – Savills disclosed that during the first quarter of 2008 house buying rose significantly. The creativity of developers that was visible through the development of commercial buildings as supporting facilities in housing estates has kept the sales of houses in Jakarta, Bogor, Tangerang and Bekasi (Jabotabek) far from stagnant.

The launching of new large-scale housing complexes like Jakarta Garden City in the first quarter of 2008 has increased the total areas of housing estates by 0.6 percent to 41,188 hectares. Tangerang remains the biggest contributor (43.5 percent) to the total areas of housing estates. It is followed by Bekasi (31.2 percent), Bogor (18 percent) and Jakarta (7.4 percent). Meanwhile, the launching of new clusters has quantitatively increased the total areas of developed housing estates and the total units of houses on sale in Jabotabek.

The total areas that have been developed have increased by 0.4 percent to 15,307 hectares, which is 37.65 percent of the total areas planned. The new units on offer in the first quarter of this year were around 6,610 units so that the total units sold in Jabotabek have increased by 2 percent to 334,607 units. Bekasi, which covers housing estates like Lippo Cikarang, Harapan Indah and Kota Delta Mas, is the biggest contributor to the total units on offer in Jabotabek; while Bogor is the smallest contributor. New house supply in Jabotabek derives from the development of old clusters and the launching of new clusters in existing housing estates, and also from the launching of new projects in Jakarta.

During the first quarter of 2008, Bogor was the most active in marketing new clusters, selling out a total of 811 units. Unlike Bogor, the majority of the new supply in Bekasi was supplied by developers that had been active in the area for sometime, and not from newcomers. Meanwhile, the housing developer most active in marketing new clusters is Bogor Nirwana Residence, which is selling a total of 660 units of its new clusters, or 81.3 percent of the Bogor housing market. In the first quarter of 2008, monthly house absorption in Jabotabek averaged 1,541 units with the highest being in Tangerang.

Meanwhile, sales and occupation in Jabotabek were at a stable level, 80.9 percent and 77 percent, respectively, because of the selling of new units and the application of prepaid buying system. Tangerang remains the most favored residential area. As an extension of housing estates in West Jakarta, Tangerang is located quite near the Jakarta city center and has much better accessibility as compared with other areas.

The operation of the Serpong-Cikunir toll road and the plan of building the Tangerang-West Jakarta artery road will help increase the accessibility of the Tangerang people. With the so-called “self supporting” township concept, housing estates in Tangerang provides various facilities in adequate quantity and quality like office buildings, education facilities, healthcare and trading sites. Besides, the “green concept” that is being offered by a number of housing estates in Tangerang also increases the attractiveness of Tangerang in the eyes of consumers. Housing complexes in Tangerang like BSD City, Summarecon Serpong, Citra Raya and Paramount Lakes are quite active to sell their units so that monthly absorption in Tangerang averaged 442 units.

During the first quarter of 2008, the majority of housing estates in Jakarta and Tangerang succeeded to sell their units for middle and upper-middle class buyers, at between IDR300 million and IDR2 billion each. Meanwhile, most units sold out in Bekasi were those meant for the middle class market with their prices standing at between IDR80 million and IDR300 million.

This showed that Bekasi is still able to catch the middle and lower-class markets mainly due to the demand for houses from local industrial workers. On the other hand, the most-favored units in Bogor are those for middle class buyers that are priced at between IDR200 million and IDR800 million. The success in selling houses is very much determined by the reputation of developers, the availability of the infrastructure and other supporting facilities.

Also, the demand for houses in Indonesia is still so high. Amidst many people’s worries about possible collapse of the housing market in Asia due to high inflation, developers in Indonesia should now take anticipatory measures. This is because such threat is unavoidable and will arrive sooner or later. (Deddy H. Pakpahan)

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