The impact of loan to value to property credit growth sustainability in Indonesia

Abstract

After the 2008 global financial crisis triggered by the subprime mortgage in the United States, financial services authorities in various countries increasingly realized that surveillance and regulation of financial institutions were not enough only through micro-prudential approach, which intended to maintain individual financial institutions, but required macro-prudential surveillance and regulation in maintaining financial system stability. The macroprudential policy aims to limit systemic risks occurring in financial distress conditions that lead to broader economic losses. One of the macro-prudential policy instruments applied by the financial services authorities in various countries, including Indonesia, is the Loan-to-Value ratio limitation. This countercyclical policy is intended to control the rate of growth in property credit. This paper discusses the effects of limiting the Loan-to-Value (LTV) ratio by Bank Indonesia on the growth of bank property credit in Indonesia. Using ordinary least squares, the results of this study conclude that adopting a tightening LTV policy when economic growth high has a significant influence in holding back the pace of five months of property credit growth after the policy was issued. While the LTV policy’s implementation, which is loosening when economic growth is slowing down, has no significant effect in driving the pace of property credit growth.