P.A. Turkey

COMMENTARY: Turkey is in a housing slump, sort of

Turkey’s housing boom may be over, just  may be.  Different indices yield contrasting results, though there is agreement that peak prices have passed. The question is how far and how deep the adjustment will go.  PA Turkey provides some preliminary ideas after the release of recent 2023 sale and price data.

Last week’s  official data revealed that house sales in Türkiye in 2023 fell to the lowest level in the last nine years, as rising interest rates and inflation weighed, while the market activity is not expected to pick up until at least the last quarter of the year.

According to the oldest and most frequently cited private housing data collector, REIDIN, “Turkey House for Sale Price Index showed a nominal increase of 2.32% in December 2023 compared to the previous month and 81.65% compared to the same period last year”, which means that inflation adjusted prices are still rising at a fairly good clip, ca 15% p.a.

 

REIDIN’s “Turkey Rental Housing Price Index showed a nominal increase of 2.54% in December 2023 compared to the previous month and 137.32% compared to the same period last year”, attesting to the plight of Turkey’s tenants.

 

There are other views of how the industry is faring

However, alternative research indicates that rents and house prices have already bottomed in inflation adjusted terms, while demand for houses may be staging a comeback.

 

While Turkey’s increasing rate of   population churn, young demographics and moderate household formation rate augur well for housing demand, falling real incomes and rising mortgage rates are a major obstacle to a sustainable recovery.

 

Home sales declined 17.5% from a year ago to 1.23 million, the Turkish Statistical Institute (TurkStat) said. The decrease is attributed to tightening conditions, elevated housing loan interest rates, and a shift toward alternative investment avenues offering higher returns.

 

According to alternative research by a well-known on-line house selling website and a prestigious private think-tank draw a different picture:

 

 House prices declining  in inflation adjusted terms?

 

The decline in house prices across Türkiye continued for the sixth month, the lates report claims. While housing demand increased after four months, annual real prices declined in December  for the first time in recent history in Izmir.

January data of the ‘sahibindex Rental and Sale Housing Market Outlook’ research, prepared in cooperation with sahibinden.com real estate sales site and Bahçeşehir University Economic and Social Research Center (BETAM), draws a more picture of the housing market, reaching different conclusions than official indices.

According to the report, the decline in real sales prices has been continuing for six months.

Annually real prices decreased to 0.2 percent across the country and to 12.9 percent in Ankara in 2023. While the decrease in the annual real price in Istanbul was 6.1 percent, the annual real price decreased in Izmir for the first time in a long time.

The number of housing listings for sale decreased both throughout the country and in three metropolitan cities. The supply of houses for sale decreased by 4.8 percent in the country, 4.5 percent in Istanbul, 2.5 percent in Ankara and 6.9 percent in Izmir in December compared to the previous month.

 

Housing demand rises after four months of decline

Housing demand, which fell sharply after the earthquakes in February, increased in July and then decreased until November. However,  demand began rising  by 5.5 percent in December compared to November.

As a result of the increase in current rental prices from November to December in Turkey, Istanbul and Izmir being higher than monthly inflation, inflation-adjusted real rental prices increased in these regions.

 

Real rent growth is gradually slowing down

According to the report, annual increases in inflation-adjusted rents across Turkey have been decreasing for some  time in contrast to REIDIN data. Annual real rent decreased by 4.8 points in December compared to November, falling to 13.5 percent year of year.

The number of rental housing advertisements decreased by 5.1 percent nationwide, 3.4 percent in Istanbul, 5.9 percent in Ankara and 5.5 percent in Izmir in December.

 

While Central Bank is expected its tightening cycle on Thursday with a 2500 basis point hike to 45%, it is difficult to say this modest tightening will be sufficient to suppress inflation to the long-term objective of 5%.  It is reasonable to assume that ex-ante real policy rates will remain in highly positive territory for the next 2 years. This scenario spells pain for the construction industry, because continually rising costs can’t be reflected to final prices, while financing expense will hurt profits.  In other words supply of new housing units is likely to decelerate in the coming months.

 

On the demand side, mortgage loan rates are expected to rise for at least a year while median incomes are rising at a much slower rate than GDP growth, reducing affordability.

 

Finally, perhaps 20% of annual house sales are for “flipping” or investment purposes, which as lost its attraction due to high-yielding TL deposits.

 

Turkey is not approaching an endemic housing crisis like China, but the most likely scenario is real prices heading further down to bring demand and supply into balance.  Finally, the mushrooming construction and property development industries are facing a painful episode of downsizing.

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