Indonesia’s property boom is good for the country in the long run. With more Indonesians having a home to call their own, the country will be more socially stable and economically balanced.
The property market underpins social mobility and ensures wealth creation. When people have property assets, they will be more concerned about their future and the future of their children.
But property bubbles can be destructive as evident in the housing market crash in the US that dragged the economy into a recession. Housing bubbles are caused when demand outstrips supply and people borrow more than they can service.
Indonesia is still a long way from a housing bubble, even though property prices have risen by 100 percent over the past 18 months. This is because mortgage levels are still relatively low and demand remains robust.
But as prices continue to rise for houses occupied by middle-income as well as lower-income families, developers will have to boost supply to prevent an overheating market. This means that more land will have to be cleared for housing projects and infrastructure built.
This is where the government must play a bigger role. It has to invest much more in macro-infrastructure such as roads, power plants and other public facilities, especially in new areas, to encourage developers to build. Without such infrastructure, developers are unlikely to take the risk of building in outlying areas.
The government must also increase plot ratios as this will encourage more building. With higher plot ratios, developers can maximize the size of a piece of land, allowing them to build at a greater intensity.
This applies to both low-cost housing as well as middle-income homes. With the ongoing property boom, such action will help meet the demands of a fast-expanding middle class.