Rabu, 08/10/2008

Testing the endurance of Asian property market

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Testing the endurance of Asian property market

NOBODY HAD EXPECTED that property credits not carefully channeled could paralyze a large economy like the United States. Those who had invested their funds in subprime mortgage bonds also suffered serious losses because the subprime mortgage crisis caused their capital vanish. Subprime mortgage is a housing credit scheme that was modified to make it easier for people to own houses including those financially incapable. For the 2002-2004 period The Fed set very low interest rates namely at only 1-1.75 percent.

As a result, the subprime mortgage and housing business experienced a booming. Bonds issued by subprime mortgage firms were also enthusiastically sought by world-class investors from the banking sector, mutual fund firms and pension fund companies as well as insurance firms g because their interests were more attractive than deposits. By June 2004, The Fed gradually raised credit interests that peaked at 5.25 percent in August 2007. Rapidly rising housing credits began to become problem loans. The majority of borrowers failed to repay their housing credits. As a result, subprime mortgage firms collapsed one by one, causing big losses to investors. Unfortunately, liquidity was in high demand.

Beside the absence of capital gains and cash inflow earnings from the coupons of default subprime mortgage, there was also demand for cash as many investors cleared their investments. Even worse, at the same time, all parties needed liquidity, which led to credit crunch. Consequently, in order to fulfill liquidity needs, the majority of investors were forced to sell their portfolios including their shares in big amounts around the world. This development resulted in the crash of capital markets around the world including the Indonesian capital market.

Finally, the US government stepped in and went all out to solve the problem that it had initially caused. A total of US$700 billion will be flowed into the market to buy bonds of problem subprime mortgage that had posed a so heavy blow to the US economy. And is there any sign of recovery? Not at all. Precisely when the US Senate approved the bailout package proposed by President George W. Bush, Wall Street indexes plunged 777.7 points, which immediately showed the so serious crisis that hit the US. Bush was said to be preparing another bailout package that included additional revision on the proposal to raise guarantees for deposits, from US$100,000 to US$250,000, which aimed to calm panicking depositors.

Also, the second bailout package was said to include clauses that give Federal Deposit Insurance Corp the freedom to borrow unlimited amounts of funds from the Ministry of Finance when it needs them. Then, what is the relevance of the US financial crisis, which has led to a global financial crisis, to the Asian property market including Indonesia? Property industries in Asia as we know them are now facing high inflation. The upward trend of inflation is predicted to continue until next year. Inflation in Indonesia in the January-September period of 2008 was 10.47 percent while year on year inflation in September 2008 was 12.14 percent. The highest inflation in the past three years was in September 2008 namely 0.97 percent.

High inflation will trigger a rise in bank interest rates and if that happens people will prefer investing their funds in non-property sectors. The so fantastic growth of property credits has caused worries. Bank credits grew 32 percent in the July-August period while property credit growth was 38.5 percent in the same period. Construction credits for projects like office buildings and shopping malls rose by around 40 percent from Rp38.5 trillion in July 2007 to Rp54 trillion in July 2008. Housing credits (KPR), apartment ownership credits (KPA) and house-shop (ruko) ownership credits or house-office (rukan) ownership credits grew 38 percent in the July-August period, from Rp73.64 trillion to Rp101.45 trillion.

As a matter of fact, credit growth had been predicted to be slowing because banks — learning from the experience of subprime mortgage in the US – will be stricter in providing loans for the property sector. Indeed, at the moment non-performing loans (NPL) in the property sector are still low and their amounts are not that alarming. As for construction credits, their NPL are only 3.79 percent. But, if credits for the construction sector continue to rise until the end of this year — judging from the quite many new property projects — and the property market will no longer be attractive because people’s buying power is weakening due to high inflation that was triggered by fuel price hikes, a mismatch will occur in the property market.

The result will certainly be fatal. Worries about credit defaults became more widespread when Bank Indonesia raised its reference interests (BI rates) to 9.5 percent while in fact The Fed and later the European central bank and central banks in Asia like in South Korea, Taiwan, Hong Kong and China are trying to cut their interests with an aim to reactivate the slowing economy of their countries.

At the moment, Asia has felt the property crisis. In China, many medium and small developers were forced to sell their projects to large developers. And, large developers sold their projects for small profits merely because they had to survive. Even the Singapore government said openly that it was facing a crisis. In Indonesia, however, economic ministers appeared in the media everyday and confidently said that the crisis to be faced by Indonesia would not be similar to the 1998 crisis. Indeed, they will not be similar. The consequences of the upcoming crisis could be less serious, but they could even be more serious. Let us just wait and see how far the Asian property market will be able to survive the large looming global crisis. (Deddy H Pakpahan)