German model to boost Turkey’s slowing housing market?
Following impressive economic growth of 7 percent in 2017, Turkey’s government has declared that it needs to keep growth at 5 percent or above this year to keep voters satisfied. Yet, the base-year effect, combined with the withdrawal of various temporary tax cuts, seems destined to slow the expansion to 3.5-4 percent this year and next. With early elections already the talk of the town, this is bad news for the governing Justice and Development Party (AKP).
Thus, before the end of first quarter of 2018, the government is set to announce a multi-faceted support scheme for a wide range of sectors in an effort to counteract an expected turn in global markets, which is set to squeeze fund flows to emerging markets. An extension of the government’s credit guarantee fund scheme, introduced with much success last year to boost growth, is only a piece of a wider plan to recharge growth in 2018.
The construction sector has always been an important driver of growth in Turkey, particularly under the current government, which uses it as a flag-bearer for its economic success. But, things aren’t going too well in this area.
The Central Bank of Turkey (CBT) releases statistics for home sales each month. The data shows that the housing market slowed down throughout the fourth quarter, with total home sales falling by 7 percent compared to the same period of 2016. Despite all the advertisements and campaigns offering better terms for house purchases, the slowdown looks broad-based, both for existing and new home sales. Mortgage-backed home sales, which constitute 30 percent of total, took the biggest hit, with a decline of 25 percent from the previous year. Such a significant drop is of course a result of higher interest rates -- mortgage lending rates had climbed to an average of 13.8 percent from 12.9 percent during the fourth quarter and increased once more -- to 14.3 percent -- as of mid-January.
Just as housing sales proved far from impressive in the last quarter, price increases were similarly uninspiring. The REIDIN Residential Property Price Indices showed annual price growth halving during the year from 20 percent at the start of 2017, while consumer price inflation accelerated to 12 percent. The growing stock of unsold housing has also hit rents, which rose 8-9 percent in 2017, again lagging inflation.
These figures are bad news for the AKP administration, which has paid particular attention to the construction industry since Turkey’s IMF-backed economic programme expired in 2008. Thus, the government decided to announce a new form of financial support for homebuilders designed to ramp up economic growth beyond its 5 percent target for the year. Of course, this is not the only plan, but with positive spillover effects on employment, the cement industry, iron, steel, wood and glass, it is a particular favourite of President Recep Tayyip Erdoğan.
So along comes the “Bauspar System”, once exported from Germany to the rest of the world. The government expects that this “contractual savings scheme” will create long-term demand for housing in Turkey. The system, which was created in Germany in the late 1800’s, is used across Europe, in the United States, India, China, South Africa, Brazil, Australia, New Zealand and many more countries. It covers not only new home purchases but repairs as well.
The textbook definition of “Bausparen” is a scheme linking savings to the right to receive a mortgage loan. The Bauspar system is based on a self-sustaining fund that consists of deposits and repayments. Bauspar savers receive less interest on their deposits than the market rate, yet they are also charged less for their loans in exchange. The mortgage loan interest rates are fixed for the whole contract term; making Bauspar loans very attractive in a wide range of countries. The interest rate of the loan usually is higher than the one for savings.
Looking at many applications of the system, a Bauspar contract is divided into four phases. At the start, the contract itself is determined. With the Bauspar contract the lender and the borrower agree on the contract sum, the savings rate, the rate of repayment and the interest rates for the savings and the loan period. In the second phase, which lasts for five to six years and defined as the “savings period”, savers normally put aside about 40-to 50 percent of the total contract sum. Once the savings period is over, in the third phase, borrowers go to the bank and take their loan, which consists of the difference between the saved capital and the contract sum. The final phase is of course when the customers start with repayment.
The advantage of the system is that interest rate are kept relatively lower and fixed for a long time, enabling Bauspar customers to make unscheduled repayments without having to pay any prepayment penalty. In the countries where it is applied, it adds to efforts to stabilise the financial system, addressing the housing problems of lower income developing countries. It protects Bauspar customers from volatile capital market interest rates. In the Bauspar system customers establish their creditworthiness by saving regularly, so demonstrating to the bank their ability to put aside certain amounts in order to get a loan. It eases the low saving rates problem in countries like Turkey. In this system, smaller loan amounts seem feasible in speeding up disposing of a huge housing stock in need of renovation.
Yet, guess what? The Bauspar system has some prerequisites for successful implementation. It requires macroeconomic stabilisation with single-digit inflation rates that are on a downward trend. No need to say, high inflation rates complicate fixing the interest rate and people have no incentive to save regularly in high inflation countries. In countries where the system is in use successfully, house prices do not spike markedly, unlike in Turkey. Forecasting future home prices should also be possible in order for the system to attract contractors. In terms of the legal background, the rule of law is a must with strong proprietary rights.
All countries that have successfully adopted the Bauspar system have also implemented a Bauspar law; with many nations building up a “special reserve fund” for deposits that helps to create confidence in the system’s safety.
While a “contractual savings scheme” at heart, the AKP will be naming the Bauspar system the “Building Savings Fund” (Yapı Tasarrufları Sandığı). In Turkey, it will target lower income groups. As is common practice in many emerging European countries under the Bauspar system, in Turkey the state will be making a contribution to the contractors’ savings ranging from 20 to 30 percent of the total contract amount.
The Bauspar system has been well tested in various countries for many years and will surely help Turkey’s construction sector as well as lower income groups. Yet, the system is not a rapid fix to the slowdown in the construction sector that the AKP government is looking for.
While the government has been working on this scheme for some years, implementing it this year will not contribute to 2018-2019 growth rates. The saving period of the system calls for five to 10 years before it creates meaningful housing demand. However, just like the private pension scheme, a state contribution of 20-30 percent appears to be an important sweetener in motivating Turkish people to save for many years before buying a house. Nonetheless, Turkey’s high inflation and house-price volatility will be important barriers to the healthy functioning of the Bauspar system.
Perhaps this new scheme will motivate the government to tackle high inflation in a serious way.