Indonesian government bets on middle class to boost home sales and revive pandemic-hit economy

The Finance Minister believes that a temporary tax break on homes for sale will “optimise the purchasing power of the middle class”

Homes valued between IDR2 to 5 billion will only be charged half the tax. HywitDimyadi/Shutterstock

From March until August, the government ministers announced the removal of taxes valued at USD350 million for some properties for sale to further increase consumer confidence — especially that of the middle class — and aid the pandemic-hit economy, reported Reuters. 

The 10 percent value added tax for properties priced below IDR2 billion (USD140,351) will be removed for the next five months. Meanwhile, homes valued between IDR2 to 5 billion will only be charged half the tax, shared Finance Minister Sri Mulyani Indrawati. 

Fitch Ratings said these tax rebates come with some requirements, including one unit max per person and restriction on sale for one year. The credit ratings agency added that this will “spur demand across homes priced at or below IDR5 billion, which we believe account for the majority of domestic demand.”

With this tax break, PT Lippo Karawaci Tbk, SouthCity, and PT Mitra Usaha Perkasa (Badak Perkasa Group) — major titleholders at the 2020 PropertyGuru Indonesia Property Awards — and other developers of affordable and low-cost housing in the country were able to breathe a sigh of relief, knowing that this measure will help them recover from the loss brought by the pandemic. 

According to Sri Mulyani, this is one of the actions within the policy package that they developed with central bank, following the announcement of a luxury tax break on some vehicles. Downpayment requirements for car loans and mortgages have already been removed by Bank Indonesia, aside from cutting interest rates, which sums to about 150 basis points. 

“This is to optimise the purchasing power of the middle class… and to boost confidence so they start to consume,” she explained. 

From 1 March to 31 December 2021, Bank Indonesia also eased the minimum downpayment for home loans to 0 percent, from the already modest 5 to 15 percent requirement. Fitch Ratings explained that this decision will enable banks to dispense the complete loan value upfront, which will have less impact instead of throughout the period of construction.

More: Pandemic halts Indonesia’s Omnibus Law designed to revive the real estate market

Airlangga Hartarto, coordinating minister of economic affairs, said the measures introduced could propel the growth of the economy by 0.9 to 1 percentage point. For 2021, the authorities aim for a 5 percent growth from a 2.07 percent GDP slump in 2020.  

The real estate sector’s tax incentive will cost the government IDR5 trillion, whilst the vehicle tax breaks will cost them IDR2.99 trillion, revealed Sri Mulyani.  

The latest budget for the National Economic Recovery has reached IDR699.43 trillion, twice more than what the government primarily designated, given the fact that they have increased the budget many times this year. 

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