ABSTRACT
The recent subprime mortgage crisis showed the need for housing price bubble monitoring. The central bank of Indonesia, Bank Indonesia (BI), responded to the recent crisis by implementing Loan-to-Value (LTV) for housing credit. However, for Indonesia, the research for strategies to prevent business failure regarding the housing price bubble and its outcome is very limited. In this paper, we will estimate the housing bubble in Indonesia to give more perspective in property business strategy. Using information from the property price index for Indonesia, we also check whether the LTV policy changes the price bubble condition, hence, change the strategy for the prevention of firms’ failures. Results from this paper suggest that a misconduct in LTV could lead to a boom in housing prices instead of acting as a counter-cyclical buffer. However, recent changes in LTV have been effective in reducing housing price misalignment, and therefore it should be safe for firms to respond with optimism in future housing price stability.
