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.