To make house more affordable for low income people

By Sasmaya Tuhuleley

The Ministry of Housing just raises the price of subsidized low cost housing from a maximum of IDR 49 million to IDR 55 million for target group I, from a maximum IDR 37 million to IDR 41.5 million for target group II, and from a maximum of IDR 25 million to IDR 28 million for target group III. The reason behind this price hike is more or less due to the recently increase of building materials. With the price hike, the developers will expectedly be encouraged to build as many as possible low cost houses, and therefore the supply will also increase. The question is can we expect that with the price increase, the demand of subsidized low cost house will also increase?

In the past three years, the development of subsidized low cost house or known as healthy simple house (“RSH”) was always behind the target set by the Ministry of Housing. In 2005, from the target of 114,000 units, the units delivered were only 79,899 or about 69.6%. From 2006’s target of 140,548 units and 2007’s target of 136,300 units, the units delivered were only 85,661 and 107,816 or about 60,9% and 79,1% respectively. Those who involved in the industry know precisely what has been happening.

The demand of low cost housing in Indonesia has been weaken since 1997’s Asian economic crisis and the world crude oil price hike in 2005. The collapse of Indonesia economy along with several other Asian countries in 1997 and the increase of domestic gasoline price due to world oil price hike in 2005 has deteriorate the purchasing power of low income people. This, in return has made difficult for those low income people to purchase a house even with the subsidy from Government.

With this regard, the decision to increase of maximum subsidized low cost house price by the Minstry of Housing will make even more uneasy for low income people to purchase a house. So it is almost impossible for Government to achieve its upcoming years subsidized low cost housing targets, if the price of house still continue to go higher and the purchasing power of low income people has not been improved yet. So, the problem is not on the supply side but the demand side.

If that is a fact, the improvement of demand for low cost housing is very crucial. It means that the Government needs to bring the low cost housing price down not the other way around to bring the price up. By bringing the price of low cost housing down, the demand of housing can be improved.

In Indonesia, where housing backlog is very huge due to undeveloped housing industry and poor economy situation, it is not so easy to do this duty. Up to the year 2004, it is estimated that housing backlog in Indonesia has been around 5.8 million units. And due to the population growth, other 800,000 unit new houses should be added every year. It means that if in a year around 400,000 units new houses both formal and informal houses were built between 2004 and 2007, in the end of 2007 the backlog has increased to 7.4 million units. So if Government wants to meet the housing need including this backlog in 10 years, there are more than 1.5 million units of houses have to be built and delivered every year.

And as mentioned before because of poor purchasing power, most of low income people can not afford to build or buy a house. So it is the Government’s duty to make house more affordable for those people. To make house more affordable especially for low income people, there are some issues has to be solved. Those issues, among others are issues on urban land development including land ownership and transfers, land taxation, and land information system ; issues on the lack of utility and infrastructure development ; and also issues regarding housing finance aspect.

With regard to urban land development, for example there is a need to strengthen the capacity of land-use management. In this case, the local Government will play a very important role, because local Government has control on land-use. The local Government has to plan the land-use in relation to urban land-use plans (“RUTR”) very carefully by involving public as a stakeholder. In the implementation of urban land-use plans, the local Government should also incorporating private sector to manage urban land development more efficiently and effectively by using resources from both sides.

For example, the local Government can provide land banks as well as infrastructures and utilities for housing in one area and invite developers to build houses in a block of land in that area. By doing so, the land price can be set and maintained in a very moderate level. Besides, because utilities and infrastructures are developed in one area, costs for the development of those utilities and infrastructures are not as expensive as if they are developed in differed areas.

The costs of land acquisition, land ownership and transfer, and land clearing combine with costs of utility and infrastructure development have a quite big portion in the cost structure of housing development. So if the costs of those components can be reduced, the production cost of a house can be reduced as well. Consequently, the price of the house can be cut down to a very moderate price. This will automatically make house more affordable for low income people.

In many countries, utility and infrastructure development become responsibility of the Government not a home buyer. But in Indonesia, a home buyer that also a tax payer has to pay for infrastructure and utility when he or she buy a house that are supposed to be financed with the taxes. If infrastructure and utility components were also subtracted from the cost structure of housing development, the cost of the house can be significantly reduced. The price of the house will follow suit. Again, this will make house more affordable for low income people.

The development of housing finance market infrastructure, especially mortgage market infrastructure is also important to make house more affordable. The aim of mortgage market infrastructure development is to provide liquidity and good access to mortgage with low interest rate for home buyers. The development of mortgage market should include both primary and secondary market.

As a conclution, it would be better for the Government to address all those issues to make house more affordable than just raise the price of subsidized low cost housing every year because the increasing price of building materials. Raising the price of subsidized low cost housing will only help the developers not the low income people. It will also not help the Government to achieve the target of delivering subsidized low cost housing to its low income people target groups.

Catatan: Coloumn ini dimuat di majalah Asian Property Investment Edisi # 6 Mei 2008