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Return on Investment in Bali Property

A dream house in Bali

House and Land Prices - Return on Investment

Across the world land prices are increasing and have become the major factor driving up the cost of housing. It can be said that the value of land is what people are willing to pay for it however with a glut of investors seeking safe places to invest money in unstable world financial markets the price of land has risen far above prices that ordinary people can afford. As such we could conclude that land has become considerably overpriced. Here we look at house and land prices in Britain and Australia and compare them with the costs of buying land and constructing buildings in Indonesia. We also look at return on investment in the Indonesian property market.

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The End of homeownership and the Australian Dream?

I remember a time, not that long ago, of the “Great Australian Dream” - the notion of all Australians owning their own home. At that time most people did in fact, but times have changed and the circumstances of ordinary people are not what they were. The dream has faded quickly as wealth has redistributed.

As some of the people become more wealthy they want to buy a second house as an investment, a safe place to put their surplus money. They have the money to pay more and so house prices have risen in line with what these people are willing to pay and, sadly, out of the reach of less fortunate people. For many in Australia these days the dream is gone and the only housing option is to rent. This is a continuing trend and property ownership is increasingly becoming the preserve of the wealthy.

Then, of course, increasing house prices mean increasing rents. The less fortunate end up being the victims of the wealthy.

In England, a place that historically had a substantial gap between the advantaged and the ordinary folk, home ownership was always a major issue with 40 year mortgages very common until eventually (not that long ago) someone realised the banking industries game and let the cat out of the bag. If you pay only a little bit more off your mortgage each week you will reduce your mortgage term dramatically. Combined with this personal disposable wealth is considerably more than after the war years and levels of home ownership have risen. Even so traditionally rent has always been quite a large proportion of household expenditure.

House prices in Britain and Australia compared

Let us quickly look at house prices in England and Australia and how they have changed in recent years compared with average incomes. Note the figures have been converted to US$ so we are not comparing apples with Aunt Mary’s goitre.

England House Price
to $US
House price Years to pay
2001 121,769 187,683 16,557 25,519 7.4
2011 236,518 364,545 21,330 32,876 11.1
% increase 94%   29%    
Australia House Price
to $US
to $US
House price Years to pay
2001 167,700 155,039 42,760 39,532 3.92
2011 530,000 489,985 69,337 64,102 7.64
% increase 216.04%   62.15%    

We see that while house prices have almost doubled in Britain they have more than tripled in Australia over a recent 10 year period, gross pay has risen by less than two thirds in Australia and less than a third in England. It will take over 11 years of paying your whole income to buy a house, once you add interest it becomes impossible. Australians are better off but in both countries it is getting more difficult.

House prices have continued to rise even though they are getting beyond the reach of ordinary people. It is becoming harder to get into property ownership. As the gap between the wealthy and the not so wealthy widens ownership is the privilege of fewer and fewer people and more and more people are moving from home ownership to rentals.

So what relevance is this to the real estate world in Bali? England and Australia are relatively calm compared with the silliness we are seeing here.

Increase in Land Prices in Indonesia and Bali

Bali has the highest rate of increase of land prices in Indonesia. According to recent research average land prices in Bali increased 34 percent during 2011, while the normal increase rate was only around 8 to 16 percent.

In some areas, the price increase was far higher. “Land prices near beaches in Seminyak, such as Legian, Petitenget and Batu Belig, experienced the highest jump compared to other areas in Bali; increasing by between 50 and 87.5 percent”.

The average gross earnings for the average Indonesian in Bali is probably around Rp24,000,000 per year while land price (without the house) is now getting to 20 times that cost for only a 100 square metres - effectively beyond the reach of most Balinese people.

A key factor here is that the difference in wealth between the rich and poor is many times greater in Bali than in countries like England and Australia.

But surely if prices keep increasing in the double digit percents something has got to give hasn’t it? Both the World Bank and The Central Bank Indonesia have been warning that the bubble (or is this more like a boil) is likely to burst. They are taking steps to try and arrest the spiralling prices by managing interest rates.

Will this have the desired effect? Certainly in Jakarta where much of the property is in the form of apartments bought using mortgages it might but what about Bali?

It is reasonable to assume that much of the money coming into Bali is not in the form of loans. It is in the form of ready cash in the hands of people who want to put it into something a little more dependable than the financial world whose credibility is just a tad tarnished of late.

It is often assumed that much of this money is coming from overseas, and probably some of it is. Though foreigners cannot own freehold titled land I have heard of several who have bought up huge tracts of land.

Even so it is far more likely is that much of the inflow of wealth is coming from Jakarta in the hands of wealthy people who want to put their money somewhere.

This is a difficult flow of cash to stem and perhaps interest rate control might not solve the problem.

There is also the suggestion by a Balinese economist, Professor Dr. Wayan Ramantha that money laundering is the reason for much of the rapid development. You have surplus money you want to hide, where do you put it? - In a hotel of course. If the hotel loses money it doesn’t matter - making money isn’t the purpose. Buying a hotel is a place to put money but, more importantly, a way that people can explain where their increasing wealth is coming from. These people are likely to pay whatever they need to get a hotel without any regard for the resulting increase in land prices, for the traffic jams caused by their rampant development or, as a result of price wars, the damage caused to the local hotel industry.

This is an almost impossible flow of money to stop.

There are other curious factors that don’t help. This is a place where the usual laws of supply and demand don't work. If the number of customers goes down local logic is there are fewer customers so you have to make more money from each and so prices are increased. This is also a place where once a price is expected people will not reduce their asking price, they will sit on empty property for years rather than reduce their price.

As a result of all this prices are increasing dramatically and the impact for the Balinese people is disastrous. They are losing ownership of their island and can never hope to buy it back.

Will the bubble in Bali property prices burst?

The question is with land and property prices rising way above the perceived value of land will the bubble burst. Many experts think it will. Already things are starting to fall apart. Real estate agents are struggling to find buyers in an oversupplied market, a market that will steadily become more overstocked as more and more unsold property piles up. In addition the Rupiah is falling and confidence is being lost.

If a bubble is coming property prices will fall so it might be that now is the time to cash in the investment if you can mange to find a buyer, there again it might be a better bet to go to a long term investment strategy.

Is building property in Bali a sound investment?

So what about the impact for the average person who wants to build a house and live here or perhaps rent it out. Here are some possible costings:

Typical House Building Costs Low Cost
Land area in are (1 are = 100 sq metres) 2 4 8
Price of land per are Rp250m Rp500m Rp1,000m
Cost of Land Rp500m Rp2,000m Rp8,000m
Size of building 100 sqm 200sqm 400sqm
Cost of building per square metre Rp4m Rp7m Rp11m
Swimming Pool 0 Rp200m Rp400m
Total cost of building Rp400m Rp1,600m Rp4,8000m
Consultants fees 20% of building cost Rp80m Rp320m Rp960m
Tax 10% of building cost Rp40m Rp160m Rp480m
Total Cost Rp1,020m Rp4,080 Rp14,240m
Anticipated Rental income per year Rp80m Rp200m Rp800m
% return per annum 7.8% 4.9% 5.6%
Possible selling price Rp1,400m Rp3,500m Rp10,000m
Profit/Loss Rp380m -Rp580m -Rp4,240m

Note: m is for millions of Rupiah

These are simply notional figures of course, it is very difficult to get meaningful information here in Bali, every piece of land is different and building costs are increasing all the time.

What they suggest is, as has been stated by Property Consultants Frank Knight, that the prices of property no longer reflect the value.

They also suggest that the calculations don't appear to work any more. The price of land has increased so rapidly while finding buyers has become more difficult to say nothing of the extensive supply of hotels.

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Copyright © Phil Wilson September 2013
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