EMRE DELİVELİ >Turkey’s real real estate boom

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RachelZiemba, regional director at myblog’s host Roubini Global Economics,was in town to meet up with market participants last week, so I invited her anda few finance professional friends to dinner on Wednesday.

Justas we sat down, the Fed announced that it was expanding its OperationTwist, where it is extending the maturities of assets on its balance sheet.This would be a natural way to start our conversation, but it didn’t getmentioned until later. Similarly, the morning’s Turkeyratings upgrade by Moody’s came up after the food arrived at the table.Instead, we spent the first half hour discussing the Turkish housing boom.

Atfirst look, there doesn’t seem to be a real estate bubble in Turkey, at leastnot in the scope of Spain or the U.S. before the crisis. Home loans have beenrising at a lower rate than other consumer loans, and their yearly growth isnow around 10 percent. However, as arecent World Bank report has emphasized, many Turks see buying a home as aform of savings and choose to finance it out of their deposit accounts.


Similarly,while the Central Bank’s house price indexrose by 23 percent since the beginning of 2010 until March of this year,inflation was 17 percent in the same period, so the real return on homes is notthat high. But the headline figure masks regional differences. For example, accordingto the same index, prices in Istanbul increased 27 percent during this period.A quick look at REIDINresidential property price indices reveals quite a bit of variation inIstanbul as well.


Oneof those in our dinner group dismissed the Central Bank’s methodologyfor calculating these indices, but even if it is accurate, prices could be keptsuppressed because of the huge supply of housing. Even a casual tourist willnot help but notice the residence ads in the media as well as the cranes allaround Istanbul.

Infact, it is the nature of this supply boom that worries me more than anythingelse: A construction company will borrow from a bank to start a new project.The same bank will then lend to consumers so that they can buy their dream homein the project. The bank ends up double-exposed this way. I was made aware ofthis scheme back in 2008 by a senior retail banker.

Thesame banking professional recently told me that the major companies are startingnew projects as soon as they sell a small share of existing ones- just enoughto get the basic cash flow going. And interestingly, each project is biggerthan the last. This strategy is bound to fall apart when sales grind to a halt.While the official figures are lagging behind, home sales are currently 20-25percent lower than last year according to the
Association of Real EstateInvestment Companies.


TheIMF had voicedsimilar concerns at the end of 2010, but those were not mentioned in morerecent documents, probably because the difference between residence andoccupancy permits, a gauge for the supply-demand gap, has fallen since then.But when their Turkey team was in town early in the month for Article IVpre-meetings, they paid a visit to Ali Ağaoğlu, the eccentric contractorfamous for his supercar collection. That somehow made me real jittery.


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