FINANCING-TO-VALUE (FTV) POLICY AND ITS IMPACT ON RESIDENTIAL PROPERTY PRICES IN INDONESIA

Abstract

Financing-to-value (FTV) policy is a macroprudential policy currently used by the central banks to maintain the stability of financial systems and prevent systemic risks. In Indonesia this is particularly the case in relation to financing of the property sector by Islamic financial institutions. This paper aims to analyse the impact of FTV policy on the residential property price index (RPPI) in Indonesia using a panel data analysis method. Indonesia is chosen in this study as it is one of the countries implementing FTV policy in its Islamic banking system. There are three important findings to be drawn from the study. First, FTV policy ratios significantly affect RPPI. Second, equal increases in all FTV policy ratios will lead to lower RPPI, and vice versa. This means that by applying lower down-payment requirements, there is an effective decrease in demand for residential property as indicated by lower levels of RPPI. Moreover, as macroprudential regulator, Bank Indonesia should pay attention to house financing through murabahah and istisna’ (HOUSE_CMI) contracts as well as apartment financing through musharaka mutanaqisah (MMQ) and ijarah muntahiyah bittamlik (IMBT) lease with ownership option (APARTMENT_MI) contracts, because the imposition of FTV policy to these financing facilities tends to be counter-productive to FTV policy aims . This is an indication of the inability of FTV policy to direct property markets towards Bank Indonesia’s objectives. Third, the success of FTV policy is subject to other policies, particularly monetary policy, that may hinder achievement of the intended objectives of FTV policy.