According to the banking giant Nomura, an increasing number of developers have failed to repay their debt and have been unable to complete their construction works since the Evergrande crisis. It appears to be true, as thirty other real estate firms have also failed to make foreign debt payments.
What actually triggered this problem in the first place? It all stems from a faulty development system and how property developers are exploiting it. Many of the developments rely on “presales”, with customers making mortgage payments on units that have yet to be built. According to Mr Evans-Pritchard, a senior economist at Capital Economics, these "pre-sales" account for 70%-80% of new house sales in China, and developers want the money to fund many projects at once. Some critics have even gone so far as to term this a massive Ponzi scheme (Hodges, 2021).
Ponzi schemes make it seem like it benefits people who join at the start, that they might obtain their promised value from the people who joined later. But at some point, the flow of buyers and investors stops. And eventually, the project couldn’t be continued. Developers and investors are overusing the leverage of lending systems and collaterals for home purchases, and this type of leverage has caused them to raise their risk-taking behavior in home purchase and investment. This was described by Professor Michael Pettis of Peking University while discussing the psychology of the bubble.
What about Indonesia? According to W&P, an Indonesian law firm specializing in Real Property, the development and sale of apartments and condos have risen dramatically in the recent decade. Back in 2018, Indonesian developers were expecting to create roughly 21,000 new apartment units.
With the number of new Apartments increasing significantly in 2018, developers are rushing to get a larger market share and increase sales to avoid a huge number of units going unsold. Hence, presale became a typical occurrence in the property industry. This pre-construction marketing strategy enables developers to take advantage of the asymmetric information over potential buyers, who cannot examine the property at the time of signing the sale and purchase agreement, and thus potential buyers' interests are frequently jeopardized due to uncertainty.
We may recall how the apartment developers Royal Afatar World (RAW) and Royal Mutiara Residence (RMR) in Sidoarjo, East Java, Sipoa Group never completed their projects despite consumers paying a down payment and making installments up to 23 times.
And as recently as 2021, disputes on bankruptcy litigation against property developers have become increasingly common, posing a significant risk to property customers. Property buyers have filed the most complaints with the Indonesian Consumers Foundation or Yayasan Lembaga Konsumen Indonesia.
The Mortgage Financing System
The issue in China's housing market is a structural one, and it also involves the financing system. First, this problem was exacerbated by easy access to loans, with banks eager to lend as much as possible. According to ANZ research, mortgages account for over 20% of all outstanding loans in China's banking sector. Second, property investing has always outpaced the market. Around 80% of the population owns property, with an astonishingly high number - over 20% in metropolitan areas, and estimates as high as 40% overall - owning several properties.
According to research done by Smith and Gjerstad in 2020, the Indonesian housing bubble could be heading towards a burst. Economic factors that are integral to its propagation have made this reality inevitable. For instance, a surge in house ownership predisposed the real estate industry to a recession, which can eventually lead to the bubble burst. The rise of ownership was caused mainly by the low interest loans offered by lending firms in Indonesia, usually known as Kredit Pemilikan Rumah or KPR.
This easy access to financing has resulted in a rise in the number of persons who owned homes despite having insufficient financial resources. It also resulted in the majority of homeowners being unable to repay their mortgages in the long term.
