Indonesia's Potential Real Estate Bubble | Free Essay Example

Indonesia’s Potential Real Estate Bubble

Words: 1162
Topic: Business & Economics

Background information

The Indonesian housing market is heading towards a burst. This reality has been necessitated by economic factors that are integral to its propagation. There are numerous similarities that are evident between the Indonesian case and the United States housing bubble in 2008. Several factors were responsible for the real estate bubble burst in the United States (Smith and Gjerstad 21). For instance, increase in the number of home ownerships predisposed the real estate sector to recession that ultimately led to the bubble burst. The upsurge emanated from easy access to loans that enabled people to own homes. This led to an increase in the number of people who owned homes despite their incongruent financial capabilities. It also led to a situation where most homeowners were not in a position to service their mortgages in the long run (Smith and Gjerstad 23).

Lending firms were forced to repossess homes, thereby triggering a meltdown in the real estate sector. The bubble burst in the United States was also attributed to instances where people acquired homes for speculation as opposed to residency. This was made worse by the availability of low interest loans that led to an increase in the number of borrowers. Lending firms did not undertake the requisite due diligence to determine the ability of borrowers to service their loans (Smith and Gjerstad 27).

Therefore, cheap loans were dispensed to borrowers whose creditworthiness was not duly established and verified by the relevant authorities. The unwillingness of lending firms to follow industry regulations was also responsible for the real estate bubble burst in the United States. It is important to note that the case of Indonesia is similar to that of the United States. For instance, lending firms in Indonesia are offering low interest loans that could predispose its real estate sector to challenges in regard to economic growth and progression. If left unattended, this situation could escalate into a crisis similar to the one that was experienced in the United States (Smith and Gjerstad 31).

Indonesia’s current economic outlook

The Indonesian economic landscape is currently experiencing signs of deceleration. There is evidence of slow growth in pertinent areas such as investments and exports. Lenders are currently focusing on providing low interest loans for those who intend to own homes (Hardaway 65). This situation is similar to the one that happened in the United States before the real estate bubble burst. The economic reality in Indonesia offers little hope in regard to growth and stability in the real estate sector. According to experts, the current trend in the housing sector could lead to further decline in the country’s investment portfolio. The rupiah continues to experience unprecedented loss in value compared to major currencies in the world economy. Economic observers predict that the growth rate could remain moderate in light of the aforementioned circumstances (Hardaway 65).

The threshold of economic growth and progression in Indonesia is not promising because there are indicators in relation to its declining potential and capacity to weather the current turbulence. Whenever an economy suffers, the real estate sector is the first casualty. It predisposes homeowners to losses that ultimately cripple the entire sector (Hardaway 69).

Projections for economic growth in Indonesia are indicative of a situation where the country could possibly experience a recession similar to one that occurred in the United States. Such economic recession would be detrimental to growth and expansion in the country’s real estate sector. Although the government is taking steps to rectify the current situation, there are certain areas that require specialized attention. For instance, the revision of fuel subsidy policy could predispose the economy to inflation. In order to remedy the abovementioned situation, the government should accentuate the spending regime in integral sectors of the economy such as housing, infrastructure and healthcare (Hardaway 73).

Introduction to U.S. pre-2007 real estate market

There has been contention as to whether economic experts have the capacity to identify and forestall the occurrence of economic bubbles in diverse sectors of an economy. The progression and eventual bursting of economic bubbles is usually difficult to detect and mitigate due to the interplay of factors that characterize its initiation and propagation (Hsu 33). The real estate bubble in the United States had far-reaching implications on the economic landscape of the country.

Prior to its occurrence in 2007, there were circumstances that played an integral role in its actualization. For instance, people were willing to secure loans in order to enlist in mortgage schemes. This was compounded by the availability of loans that were being offered at very low interest rates (Hsu 34). Such policy undertakings were instrumental in the process that led to the real estate bubble in the United States. However, it is important to note that it was very difficult for experts to predict outcomes in regard to such undertakings. Before the real estate bubble in the United States, the economy experienced heightened spending in crucial sectors such as infrastructure and housing (Kemmer and Herfurth 79).

The overspending in one sector at the expense of others led to a strain that ultimately precipitated the real estate bubble. However, it is important to note that the real estate bubble was preceded by signs of recession in the overall economic landscape. Effects of the real estate bubble in the United States were felt in the global economy because the US economy controls the economies in other countries around the world (Kemmer and Herfurth 79).

Effects on Indonesia’s economy following the burst of housing bubble

The housing sector is integral to the development of economies. Although success in all sectors reflects in the pace of economic progression, there are certain sectors that are pivotal in regard to the above scenario (Roberts 11). For instance, burst of the housing bubble could affect the threshold of economic growth in Indonesia. The housing sector controls colossal amounts of capital that is necessary in the growth and expansion of an economy. Therefore, the Indonesian housing bubble burst would affect the current projections in terms of economic growth. People would experience challenges such as loss of homes owing to the inability to service their loans. In effect, other areas of the economy would also experience the ripples that emanate from such realities (Roberts 16).

Potential impacts on the macroeconomic variables

The housing bubble burst would affect the macroeconomic landscape in Indonesia. It could have financial implications that would ultimately trigger a large scale economic crisis (Semlali and Collyns 82). This reality would replicate the situation that was evident in the 2008 United States housing crisis. The aftermath of a housing bubble burst would predispose people to financial constraints in regard to their daily spending and access to credit. In fact, financial and economic crises reduce the creditworthiness of individuals because they have little or no access to opportunities that enable them to spend or invest. This in turn affects the borrowing power and overall circulation of credit in the economy (Semlali and Collyns 84).

Works Cited

Hardaway, Robert. The Great American Housing Bubble: The Road to Collapse. Newyork: ABC-CLIO, 2011. Print.

Hsu, Sara. Financial Crises, 1929 to the Present. Newyork: Edward Elgar Publishing, 2013. Print.

Kemmer, Michael, and Dirk Herfurth. The Economics of the US Price Bubble in the Early 21st Century. Newyork: GRIN Verlag, 2012. Print.

Roberts, Lawrence. The Great Housing Bubble. London: Monterey Cypress LLC, 2008. Print.

Semlali, Senhadji, and Charles Collyns. Lending Booms, Real Estate Bubbles and the Asian Crisis, Issues 2002-2020. Newyork: International Monetary Fund Asia Pacific Dept, 2002. Print.

Smith, Vernon, and Steven Gjerstad. Rethinking Housing Bubbles: The Role of Household and Bank Balance Sheets in Modeling Economic Cycles. London: Cambridge University Press, 2014. Print.