There is a rising concern that house prices in Turkey are increasing at an unsustainable rate. According to the Turkish Central Bank’s data, Turkish house prices have consistently grown for the last several years. The chart below shows the rise in inflation adjusted housing prices in the country and specifically in three of the country’s largest cities, Istanbul, Ankara and Izmir. Istanbul’s whopping home price surge means that its housing bubble may be able to slam London’s or Shangai’s. Considering the housing price dynamics in two other large cities in Turkey, the housing market in Istanbul is probably driven by irrational exuberance. There is no need to mention that this makes the most populous metropolitan area in the country unaffordable for young people causing shortage of skilled labor, or it increases wealth inequality between home owners and renters. But, an unsustainable boom could also lead to an eventual fall in prices, with corresponding bank losses and negative wealth effect. There one should note that the expensive house prices in city threaten the economy of the city in various ways.
During post-2008 global recovery period, low interest rates has been one of the main theme of the economies across the global as well as in Turkey. As expected, low rates reduced the cost of mortgage payments, making buying a house relatively attractive. This eventually increases in demand for housing is one significant factor in pushing prices. The chart below shows that total mortgage loans showed a solid growth and stood at 25% as of total GDP in Turkey at the end of 2014. Still, the figure looked less threatening compared to the countries that suffered recessions due to the housing market bubbles. So, technically, if we ignore the deteriorating business confidence, a potential bubble burst will have a limited effect on the financial system. However, it is not hard to imagine what would happen in case of a housing market crash in Istanbul, where the heart of Turkish economy is at, that is, likely to turn the country from a success story to a part of emerging market bubbles.
UPDATE on 3/28/2016:
Guess what happened in January.
Turkey’s house prices bull market momentum as a consequence of years of negative real interest rates policy, which is somehow called tight by Central Bank of Turkey, is rapidly translating into positive economic data as illustrated not by the unemployment rate surging to 9.9% in seasonally adjusted terms, or the GDP growth reported to be occurring at an annual rate of 2.1% substantially missing analysts’ expectations, but by the house prices rising, crazy-madly in some parts.
The Central Bank of Turkey has been releasing the housing prices data, an only narrowly watched gauge of the health of the Turkish housing market, since the beginning of 2010 which is visualized as follows. Because the lack of important data sets like disposable income, rental prices, it is nearly impossible to figure out if a housing bubble about to burst exists in Turkey, but, for sure, if we have home-buyers’ confidence index in Turkey, the chart would be rotated to 90 degrees.
In real GDP terms, Turkey grew by roughly 20% between Q110 and Q214, while housing prices rose 63% during this period, that suggest housing prices grows faster than GDP does. Despite the fact that GDP and house prices are not linked according to many economists, house prices are very likely to outperform the disposable income significantly.
Finally here is the ugly fact. A growing number of investors now see inflation moving above trend levels while the domestic growth remain below-trend. As a results of this, a huge transfer of wealth under way as a consequence of the inflation trend from those that work and rent, or so-called wage slaves, to those that own the assets (prosperity) as inflation both erodes purchasing power of earnings and inflates leverages asset prices.
The biggest failure of modern capitalism has been the housing bubble that led a big financial crisis several years ago. The United States housing market collapsed following the increasing foreclosure rates, than huge loss for the banks by assets invested in mortgage market, unprecedented bail-outs by government and other consecutive undesirable events in market followed. The U.S. Federal Reverse is still trying to heal the market with its billions of dollars asset-purchasing program to improve the liquidity in the market.
The crisis, of course, not limited to developed world. With the beginning of the recession era in developed economies, the emerging economies were being scrutinized more precisely. Some defined emerging economies themselves as bubble, without a deeper look at any market.
So, the question is, is there a housing bubble in Turkey? Apparently not. There are no clear signs signaling a housing bubble. In addition, the mortgage market seems healthy due to low non-performing housing loans ratio.
Eventually, in 2010, we began to have the official data showing housing prices by the Central Bank of Turkey. Comparing to the hourly earnings data released by Statistical Office, the gap between house prices and wages is not widening. This gap was pre-indicator in developed economies for the upcoming crisis.
According to the Real Estates Investment Trust Association, GYODER, 7 million new residential unit must be built until 2023 to meet the demand driven by demographics, social changes and regeneration efforts.
However, there is some analysis asserting the average price of housing units in urban center beats the budget of average household. Unfortunately, we do not have the actual data supporting this claim but, honestly, the number of property projects targeting upper-income class is drastically rising and this rise could lead a surge in old units and make them unaffordable, just like it is has done in the United Kingdom.