The urban areas of Indonesia  were expanding rapidly at about 800,000 households per year during the 2000-2004  with  a growth rate of over 3.5 percent.  A substantial majority of urban housing is constructed incrementally with the 70 percent of urban dwellings and development of informal dwellings  located in areas that are laid out not meeting official standards  is facilitated by private developers laying out new sub-divisions with rights-of-way reserved for future road and infrastructure installation where plots are sold with the possibility of registration.

The  formal mortgage finance has had a modest role in the country. In 1996 the outstanding mortgage debt was 3.1 percent of GDP but lending declined sharply after the financial crisis initiated in 1997 and in 2005 the ratio stood at only 1.8 percent and for developing countries the analyses have focused on the choice among broad alternative financing options. The options are a pure cash purchase, perhaps including informal borrowing.

This article focuses on the decision of Indonesian home purchasers to take a loan from a formal financial institution or otherwise finance their homes. It presents information from a 2008 representative household survey on the financing plans of Indonesian households who live in the nation’s seven largest metropolitan areas and plan to purchase a dwelling in the next three years. Since only families who indicate that they were planning to purchase completed units are included, as opposed to beginning or continuing incremental construction of a dwelling, respondents are expected to be in the upper part of the income distribution.