P.A. Turkey

ANALYSIS: Turkish house sales slump, collapse can be in the making

Turkish home sales fell 7.7% year-on-year in May to 113,276 houses, with sales to foreigners dropping 46.9%, data from the Turkish Statistical Institute showed on Thursday.  YoY house sales dropped by 16.5%, as would-be buyers were deterred by high prices and increasingly tight mortgage financing.  Bahcesehir University-linked think tank Betam detects the first signs of demand destruction, as  Turkey becomes the country with the highest housing inflation.  If the new economy team of Mehmet Simsek and Gaye Erkan can raise rates and stay the course, Turkey’s inflated housing market could crush a la China, pulling down the bloated construction industry, as well as causing large losses to commercial lenders.

 

Russians topped the list of foreigners with 991 houses purchased, reflecting still how many have sought a financial haven in the wake of Moscow’s invasion of Ukraine and the fallout of Western sanctions, however the drop in the share or non-residents in total sales indicates the market is becoming too frothy even for this price insensitive segment.

The data also showed May mortgaged sales fell 6.3% from a year earlier to 27,476 houses, accounting for 24.3% of the total sales in the period. This is from a 2020 peak of 35%, as banks become exceedingly reluctant to extend 10 year fixed-rate loans at annualized rates far below trend inflation.

Turkey is now the country with fastest increases in house prices

The Bank for International Settlements (BIS), of which the Central Bank of the Republic of Turkey is a member, announced the annual rate of increase in housing prices in 58 countries between the last quarters of 2021-2022.

While global housing prices increased by an average of 6 percent on an annual basis between the last quarter of 2021 and the last quarter of 2022, it is noteworthy that the rate of increase in housing prices in Turkey is much higher than in other countries.

Turkey has become the country with the highest increase in housing prices in the world, with a 51 percent real increase in housing prices and a 168 percent nominal increase due to inflation.

According to the information obtained from BIS data, while housing prices increased by 7 percent compared to the pre-pandemic period, real increases in housing prices continued to be experienced in only 14 of 58 countries as of the last quarter of 2022.

Nearly three-quarters of countries in the BIS data experienced negative home price growth by the fourth quarter of 2022.

While annual real house prices decreased in 42 of 58 countries, there was an increase in 14. In the USA, on the other hand, there was no change in real housing prices.

Among the 14 countries where the annual real increase was experienced, it was noteworthy that the increase in Turkey was considerably higher than that of other countries. The number of countries whose real increase rate exceeded 5 percent was only 5 countries.

Turkey’s housing boom rapidly turned into a speculative mania, as financial repression made it impossible for savers to find real returns of investment in the financial market.  Housing essentially became the sole hedge against inflation, which brought in large number of house flippers into the market, which treated residences as a tool for trading.

While Turkey was the country with the highest increase with 51 percent, Israel ranked second with 11 percent, Iceland third with 9.9 percent, Russia fourth with 9.7 percent and Serbia fifth with 7 percent.

 

March data reveals 132.8% annual rise in prices

According to the latest Housing Price Index (KFE) data for March 2023 shared by the Central Bank,  prices increased by 5.4 percent compared to the previous month and by 132.8 percent compared to the same month of the previous year.

Prices increased by 55.4 percent in real terms in the same period, which is the territory where demand destruction becomes visible.

 

 

Betam Study:  Demand deflating gradually

According to Bahcesehir University linked think tank Betam, the average price per m2 of residential properties for sale across Turkey increased by 104.6 percent compared to April of last year, reaching 19,888 TL (ca $1K  in April exchange rates). During the same period, the current prices of residential properties for sale increased by 94.5 percent in Istanbul, 127.8 percent in Ankara and 110.4 percent in Izmir. In addition to current prices, inflation-adjusted (real) sales prices increased both throughout the country and in the three big cities, as the increase in the current house prices for sale from March to April in Turkey and in the three big cities was higher than the monthly inflation.

Housing demand index decreased by 13.3 percent compared to March. It is estimated that the Ramadan Feast holiday, which lasted for 9 days, also contributed to this sharp decline. The ratio of the houses sold, which we monitor as an indicator of vitality in the housing market, to the number of advertisements for sale has also decreased throughout the country and in three metropolitan cities. In addition, the “tenure of closed ads”, which shows how long the house for sale ads are posted, which we use as another vitality criterion in the housing market, increased across the country, in Istanbul and Izmir, compared to the previous month, but decreased in Ankara.

According to data for the first week of June, the interest on 3 month savings deposits  reached 38%, while the policy rate is 8.5%.  These will soar further, as Turkey’s central bank initiates a monetary tightening cycle by the end of June.  High returns on deposits and tighter mortgage credit are likely to end the housing boom in Turkey.

The crash will be limited to the high-end of the market, where investment demand focuses.  Used houses and those built for middle class incomes are largely intact from the volatility, as a relatively young population boosts demand.

Banks’ mortgage loans are largely safe, because Turkish household have an excellent record of repayment, while the new economist stability program is not expected to reduce employment significantly. However Turkey’s construction and home developing companies are heavily leveraged and have thin cash cover.  While a recent estimate about the size of such loans in banks balance sheets cannot be found, it stands to reason that a down-turn in the housing market will depress cash flow triggering rising non-payments.

 

Atilla Yesilada

 

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