Turkey’s housing bubble may be bursting

Turkey’s once-booming housing market is showing signs of collapse, as political turmoil and accelerating inflation deter buyers.

House-building, which President Recep Tayyip Erdoğan’s government has relied upon as a mainstay of economic growth, is slowing markedly. At the centre of the decline is Istanbul. Many newly built properties in the city’s outlying neighbourhoods remain unsold, creating a glut in the market. And bargains can be had for foreigners wishing to pick up properties in the country’s holiday resorts, as developers struggle to find local buyers.

The central bank published a report this week showing that residential property prices fell at the fastest rate in five years in September, when taking into account inflation. Price growth of an annual 9.6 percent in lira terms, excluding inflation of 11.2 percent that month, was the lowest since 2013, it said.



Historical House Price Index (Source: Central Bank of Turkey)
Historical House Price Index (Source: Central Bank of Turkey)

Turkish house-builders have been buying up hundreds of thousands of acres of land in and around Istanbul over the past few years as the city expands towards the Black Sea and along the Marmara coastline. Land near a new airport to the city’s northeast, due to become the world’s largest by passenger capacity, has been a focal point for expansion. But a steep decline in the lira, double-digit inflation and political tensions since a failed coup last year are taking their toll on the market.

Prices in Istanbul rose just 5.7 percent year-on-year in September, the central bank data showed, meaning an inflation-adjusted loss for home owners of 5.5 percent. Prices in the capital Ankara increased 7.6 percent. Turkey’s third-largest city of Izmir, where many secular Turks are now choosing to live, has been bucking the trend. Prices there rose 17 percent.

The picture for most of the country becomes even more bleak when taking account of losses for the lira, which amounted to 19 percent in the 12 months to September. A home in Istanbul valued at 500,000 lira ($167,000) in September last year was worth 529,000 lira ($148,000) 12 months later.

The lira has slumped a further 10 percent since then.  

The stress of high inflation and a depreciating currency is now impacting mortgage lending. A report published last week by the government’s statistics agency showed that the number of homes purchased with mortgages sank an annual 20 percent in October. The decline was 4 percent the previous month.

Government policy is responsible for at least part of the depression in the housing market.

Rather than tackle inflation, and resulting high interest rates, Erdoğan has sought to stimulate the industry through a government-backed loan guarantee scheme and prioritise economic growth. The central bank has done its best to align itself with Erdoğan’s goals, but has still been forced to increase the cost of borrowing for the nation’s banks, forcing them to borrow in its so-called “late liquidity window” at a rate of 12.25 percent.

But despite the inflationary environment, Erdoğan, facing pressure from construction companies, many of whom are close business allies, is calling on banks to cut interest rates and lend at lower cost.

However banks, forced to borrow at higher rates from the central bank, have been forced to raise interest rates on mortgages to ensure they do not make losses on the lending. Costs for homeowners have now risen above a psychological level of 1 percent monthly, save for all but the smallest and shortest-term loans.

Banks are also becoming less inclined to lend because profits on mortgages are considerably lower than for cash loans, car loans or commercial loans, which return as much as 20 percent annually.

Troubles in the housing market are also impacting the value of Turkish real estate companies.

Back in 2013, a secondary public offering of government-controlled Emlak Konut became the largest listing among property developers in Europe since the 2008 financial crisis. The company, Turkey’s biggest listed real estate firm, is one of Erdoğan’s main tools for driving housing construction.

Shares of Emlak Konut have dropped 15 percent over the past year, reducing the company’s value to 9.3 billion lira. Losses since the end of August total 23 percent.

In an effort to stem a decline in profitability, Emlak Konut has offered to restructure loans for its customers who purchased properties before December last year. Interest rates on offer are 0.5 percent monthly, according to its website. Another campaign by the company offers customers the chance to buy a property with a down payment of just 5 percent and to repay the remaining debt over 20 years, loan conditions that banks would find impossible to match. It is also currently offering properties at a new residential and commercial complex near Istanbul’s new airport at a 12 percent discount in order to stimulate sales.

Istanbul housing project

Last month, Ali Ağaoğlu, a property magnate and close business ally of Erdoğan, known for his flash cars and flamboyant lifestyle, warned of a wave of impending bankruptcies in the industry. Firms are under financial pressure because prices of new properties are declining while costs of construction, including land and materials, were increasing, he said.

“Some will have to cut off a finger, others an arm,” he said.

Land purchases in Istanbul can sometimes equal as much as half of all construction costs. Other costs are on the increase as well – the lira’s decline against the dollar means that imported materials and machinery are becoming more expensive.

Material costs for construction of buildings have risen 25 percent in the past year, more than double the rate of inflation, the statistics institute said in a quarterly report published last month. Overall construction costs have increased 22 percent on average, it said. 

Troubles in Turkish industry, particularly the construction sector, could lead to serial bankruptcies unless the government restores confidence and companies gain better access to loans, Orhan Ökmen, head of the Japan Credit Ratings Agency for Eurasia, said this month.

Turkish builders are having a more difficult time financing large-scale projects, as losses in the lira’s value against foreign currencies increase funding costs, he said.