Ussal Sahbaz: Turkey’s housing bubble impedes innovation and productivity

A report published this month included the following findings: “Economic activities in our nation’s largest city are shifting from knowledge-based sectors such as finance, media, information technologies and  R&D to construction and real estate. Rising real estate prices point to a structural transformation and productivity declines as a result. As real estate prices rise, skilled labor is unable to find affordable housing and flee the city. Therefore, knowledge-based businesses are getting weaker.”

You may have thought that I am talking about Istanbul. Because the similarities must have caught your attention. But the report in question was written for London. For those interested, the title of the report is “The role of London in the UK’s productivity puzzle”.


House prices in Istanbul increased by 156% last year. The increases in Kocaeli and Tekirdağ, the two neighbors of Istanbul, are 181% and 165% (Source: Endeksa). These are approximately twice the increase in consumer inflation. Whatever risk exists for London regarding real estate prices, it also exists for Istanbul. Therefore, the Turkish economy is under the threat of rising real estate prices. So how did we get to this point?


The first reason is, of course, the low interest rates that have been going on for over a decade globally. While the world leaves  the era of low interest rates, Turkey remains fixated on the past. As savings cannot be placed in reasonable-yielding  fixed income instruments, asset prices and especially home prices rise. However, the house is not just a financial investment tool, but a fixed investment. Therefore, economic policies should be designed according to the broad economic and social effects of housing prices.

The second reason for the bubble is house purchases by foreigners. Neighborhoods in London, which have become dark because of the houses that Arabs and Russians bought but do not live in, have been a problem for years. The real estate lobby is one of the biggest obstacles to solving this problem.


The same problems are popping up  quickly with us, too. The Russians, who turned to Istanbul because they could no longer buy a house in London, accelerated this process. In certain places, foreigners should be completely prohibited from buying property for two years. Third, zoning rules shape property prices—usually upwards—around the world. The worst part is that the rules are arbitrary. To legitimize this arbitrariness in London, they say, “we give special permission to buildings erected with special visual merit”. Architects who undertake these projects are called “trophy architects”. If you want to get a zoning permit for your skyscraper, you produce architectural project with a higher-than-normal construction cost. And then you sell them to Arabs who only come to town for two weeks a year. Unfortunately, similar abysmal habits have been widely used to alter  development plans in Turkey.

An approach to zoning that will accommodate many people in a small area is required. The way to do this is not to ban studio type houses in our country, where divorces are at record levels. Such measures, which are said to be undertaken “to protect the family institution”, increase house prices. Similarly, the necessity of parking for residences. According to what economists call the Tinbergen Rule, you cannot achieve two ends with one policy tool. It is not enough to both protect the family institution and solve the parking problem, while saying that my citizens can live at reasonable prices. We need to decide what our priority is.


Excerpt from author’s column linked here


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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and and has contributed to the financial daily Referans and the liberal daily Radikal.