K N O W L E D G E F O R A C T I O N
Urbanization Landscape and Inclusive Housing Finance in
Indonesia
November 7, 2016
Susan M. Wachter
Albert E. Sussman Professor of Real Estate
Professor of Real Estate and Finance
K
70.0 80.0 90.0 100.0 110.0 120.0 130.0 140.0 150.0
K N O W L E D G E F O R A C T I O N
The Challenge: Access
Name of Presenter 3
• Affordable housing where the jobs are
• Public services
• Financing for infrastructures
K N O W L E D G E F O R A C T I O N
Mortgage Market Design for
Macrostability and Access
Name of Presenter 4
• Mortgage markets can be instrumental in providing access to growing urban
job markets
• Achievable through primary and secondary market design
• Structured to minimize risk and to deliver affordable mortgages
K N O W L E D G E F O R A C T I O N
Attracting Capital at Affordable Lending Rates:
Fundamentals
Name of Presenter 5
• Low and stable inflation
• Low interest rates and credit risk
• Sound banking system
K N O W L E D G E F O R A C T I O N
Indonesia Metrics
Name of Presenter 6
• Inflation
• Long term interest rates
• Banking sector
• Economic growth
• Informality
• Urban growth rate
K N O W L E D G E F O R A C T I O N
Moderate Recent Inflation
Name of Presenter 7
0%
K N O W L E D G E F O R A C T I O N
Moderate 10Y Government Rate
Name of Presenter 8
Indonesia 10Y Decreased to 7.27% on Nov. 3.
K N O W L E D G E F O R A C T I O N
High Recent GDP Growth
Name of Presenter 9
$0
1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
U
SD
Year
100%
1990
2000
2010
2015
< 5K USD
10K-15K USD
5K-10K USD
>15K USD
Average household disposable Income (RHS)
Annu
Source : CEIC, UBS Research
K N O W L E D G E F O R A C T I O N
Non-Performing Bank Loans
K N O W L E D G E F O R A C T I O N
Indonesia Urban Population in Slums: 2010 23%
(1990: 51%)
K N O W L E D G E F O R A C T I O N
Urban Population Growth
Name of Presenter 13
0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Indonesia, Urban Population (Million)
0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
K N O W L E D G E F O R A C T I O N
Indonesia Mortgage Market as % of GDP: 2.8% (2014)
Susan M. Wachter 14
K N O W L E D G E F O R A C T I O N
In Sum
Name of Presenter 15
• Coming out of the Asian Financial Crisis, Indonesia has experienced a rapid
rise in GDP.
• At the same time rapid urban population growth generates increased demand
for housing and infrastructure
• Bank lending (primary mortgage market) is sound
• The state of the housing finance system will be a major determinant of the
K N O W L E D G E F O R A C T I O N
Housing Finance as Source of Macro-Instability-1
•
FRM matches assets and liabilities of households
while ARM expose borrowers, banking system and
economy to payment shock
•
Impact on consumption (Mian & Sufi 2009; Mian, Rao
and Sufi 2013)
K N O W L E D G E F O R A C T I O N
Today’s Global Low Interest Rate Environment –
Will
it Last?
Name of Presenter 17
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
%
Year
Long Term Interest Rate by Country
K N O W L E D G E F O R A C T I O N
Housing Finance as Source of Macro-Instability-2
•
Real Estate booms and financial busts frequently
associated (Herring & Wachter 1999; Reinhart & Rogoff
2008)
•
Recent history
–
Japan
–
1990
–
Asian Financial Crisis
–
1997
–
Subprime in the US
–
2007
–
Europe
–
2007
•
Why: financial accelerators (Abraham & Hendershott
1996; Herring and Wachter 1999; Bernanke 2007)
K N O W L E D G E F O R A C T I O N Richard Herring and Susan
Wachter. Real estate booms and banking busts: an international perspective.
http://fic.wharton.upenn.edu/fic/ papers/99/9927.pdf
Financial accelerators in banking
Susan M. Wachter 19
•
Why is this?
–
Lack of short selling
–
Irrational exuberance
K N O W L E D G E F O R A C T I O N Susan M. Wachter 20
GFC originated with house price bubble in many economies
K N O W L E D G E F O R A C T I O N
Volatility of housing asset prices with mortgage
lending
•
Housing assets particularly vulnerable to bubbles and busts and to
extreme tail risks (Levitin and Wachter 2013)
•
Securitization can complete market and correct for underpricing of
credit risk (Pavlov and Wachter 2009)
K N O W L E D G E F O R A C T I O N
In Conclusion
•
Need to access capital markets for housing finance
•
Stable housing finance => affordable mortgage and
macrostability
•
Secondary markets can contribute to macrostability
•
Research and information gaps:
–
Secondary mortgage markets: institutional details
matter
–
Transition to formal housing: role of mortgage market
K N O W L E D G E F O R A C T I O N Susan M. Wachter 23
