Analysis: Measuring the impact of LTV relaxation on the property sector

Bank Indonesia (BI) plans to enact a policy to ease the loan-to-value (LTV) ratio for property loans (housing loans (KPR) and apartment ownership loans (KPA)) and down payments for vehicle ownership loans in June.

BI has decided to loosen the LTV ratio this year following the slowdown in KPR and KPA, as well as in automotive loans. The LTV rule was first introduced in 2012 to apply to landed houses and apartments with an area of more than 70 square meters (sqm).

At that time, the growth of residential property loans was growing very rapidly, reaching 44.5 percent year-on-year (yoy) in July 2012, higher than the overall loan growth in the same period of 25.2 percent yoy. After the implementation of the LTV policy in 2012, the growth rate of residential property loans slowed to 17.8 percent yoy by June 2013.

However, the government still felt the need to suppress the growth of property loans, so refined the LTV ratio for particular types of property. The refinements included the imposition of lower LTV on purchases of second and further homes or apartments, which was not regulated in the previous LTV rule in 2012.

According to the updated LTV rule, the maximum loan for KPR and KPA type 70 and above or with a building area greater than 70 sqm was 70 percent, 60 percent for second homes and 50 percent for third homes. This action was prompted by the fact that these types of property are more likely to be used as investment and speculation.

Moreover, for KPA type 22-70, with building areas of 22-70 sqm, the maximum LTV is set at 80 percent, at 70 percent for second properties and 60 percent for third and further properties.

BI explained that the maximum LTV regulation was also needed to suppress KPR and KPA growth, which was not compensated by its fundamentals. KPR and KPA growth is considered to threaten the banking industry’s role in credit disbursement.

BI wants property loans to grow in a healthier way. Another factor behind the central bank’s move to tighten rules on LTV is the high proportion of loan-holders who take out more than one loan. According to BI, in 2013 around 31,300 people had two mortgages, constituting a loans portfolio of Rp 22.9 trillion, or 10 percent of total mortgages.

In 2013, BI also prohibited financing ownership of second and further homes that are under construction (indent). These tightened rules in 2013 further suppressed the growth of property loans.

The 2012 and 2013 LTV regulations resulted in the deceleration of property loans growth. KPR and KPA growth slowed from 44.52 percent yoy in July 2012 to 12.48 percent yoy in March 2015.

According to BI, easing LTV rules in the consumer loans sector is necessary because of the importance of loans for property and motor vehicles in terms of the national economy. The central bank believes that the LTV revision could boost national bank loan growth, allowing it to reach the overall loan growth target of 15 percent to 17 percent.

More detailed rules in easing property LTV will be focused on first-home ownership, since first-home buyers are likely to use the property as their home, not for speculation or investment purposes. BI plans to loosen LTV for first homes to 80 percent for KPR and KPA.

The percentage is higher than the current rule of 70 percent, so that consumers who use KPR and KPA for first-home ownership need only prepare a down payment of 20 percent of the property’s price.

On the other hand, the central bank also stressed that it did not want to damage loan quality. The only banks covered by the new rule, BI said, were those who could maintain their non-performing loan (NPL) ratio below 5 percent. BI explained that banks with NPL ratios above 5 percent would not be eligible for the relaxed LTV rule.

According to the Indonesian Banking Statistics March 2015, the value of mortgage financing by commercial banks reached Rp 305.95 trillion, a 12.5 percent increase yoy. However, the growth was lower than in the first quarter of 2014, when mortgage financing value grew 23.6 percent yoy. This slower growth is partly due to the impact of the application of the LTV rules and the slowdown in domestic economic growth.

According to our view, the relaxed LTV stipulation will accelerate the growth of property loans, albeit only slightly. If the new LTV rules are set to equivalent types as the LTV rule in 2013, we predict that each affected segment will see an increase in KPR and KPA growth of around 0.2 percent, excluding the effects of other factors such as interest rates.

Therefore, in our view, the easing of LTV rules will probably not have a significant impact on the growth of overall loans. This is partly because the shares of of KPR and KPA are still very low, at 9.7 percent of total bank loans as of March this year.

On the other hand, the policy will have a positive impact on consumers who rely on mortgage loans, assuming that most home buyers still use mortgage facilities. A BI survey in the first quarter of 2015 stated that around 75.5 percent of home buyers used KPR and KPA to finance home purchases, while about 14.8 percent used cash installments and 9.8 percent paid cash.