LAND MARKETS AND THE EFFECT OF REGULATION ON FORMAL‐SECTOR DEVELOPMENT IN URBAN INDONESIA

Abstract

Until recently, urban land and housing markets in Indonesia seemed to function well. Informal‐sector development provided low‐income housing affordably. Through government programs, formal‐sector developers could build housing for all but the poor. Since 1989, however, daily conversation pictures land speculation as rampant and formal‐sector housing as rising beyond the means of the middle class. Newspapers carry stories of conflicts between small landowners and large developers with government officials in between. This article investigates this situation by addressing two related questions: are urban land prices rising “too fast?”; how do land regulations and development practices affect costs, and who pays these costs? The article includes quantitative estimates of urban land prices, changes in urban land supply, movement of land through the permitting process, and the effect of development regulations on costs. Data come from a literature survey and interviews of some of the largest formal‐sector developers in Indonesia. A principal finding concerns a development regulation called a “location permit” and the “social function” of land in Indonesian law. Although helpful as a means of assembling land in Indonesia's highly fragmented land markets, location permits allow formal‐sector developers to hold land off the market and pay low prices to small landowners. Ultimately, the “social function” of land under Indonesian law holds down the price formal‐sector developers pay for land, but not at the price at which they sell their product. The article concludes by proposing reforms to the regulatory process.