EMRE DELİVELİ > Turkey’s real real estate boom

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Rachel Ziemba, regional director at my blog’s host Roubini Global Economics, was in town to meet up with market participants last week, so I invited her and a few finance professional friends to dinner on Wednesday.

Just as we sat down, the Fed announced that it was expanding its Operation Twist, 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 get mentioned until later. Similarly, the morning’s Turkey ratings 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.

At first look, there doesn’t seem to be a real estate bubble in Turkey, at least not in the scope of Spain or the U.S. before the crisis. Home loans have been rising at a lower rate than other consumer loans, and their yearly growth is now around 10 percent. However, as a recent World Bank report has emphasized, many Turks see buying a home as a form of savings and choose to finance it out of their deposit accounts.


Similarly, while the Central Bank’s house price index rose 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 not that high. But the headline figure masks regional differences. For example, according to the same index, prices in Istanbul increased 27 percent during this period. A quick look at REIDIN residential property price indices reveals quite a bit of variation in Istanbul as well.


One of those in our dinner group dismissed the Central Bank’s methodology for calculating these indices, but even if it is accurate, prices could be kept suppressed because of the huge supply of housing. Even a casual tourist will not help but notice the residence ads in the media as well as the cranes all around Istanbul.

In fact, it is the nature of this supply boom that worries me more than anything else: 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 home in the project. The bank ends up double-exposed this way. I was made aware of this scheme back in 2008 by a senior retail banker.

The same banking professional recently told me that the major companies are starting new projects as soon as they sell a small share of existing ones- just enough to get the basic cash flow going. And interestingly, each project is bigger than 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 20-25 percent lower than last year according to the
Association of Real Estate Investment Companies.


The IMF had voiced similar concerns at the end of 2010, but those were not mentioned in more recent documents, probably because the difference between residence and occupancy 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 IV pre-meetings, they paid a visit to Ali Ağaoğlu, the eccentric contractor famous for his supercar collection. That somehow made me real jittery.


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Notice on comments

Blue Dotterel

6/26/2012 5:08:25 PM

James, you obviously have missed Erdogan's plans to fill those buildings in the next 25 years. He has given orders to Turkish women to have many more children. Does Erdogan have financial interests in the building sector? Maybe, he is getting nervous.


6/25/2012 11:43:25 PM

The current housing boom in Turkey is an embarrassment, Turks do not build western standards, You will see strange looking buildings in Turkey that you will not see anywhere in the world. Cheap labour with uneducated architects has transformed Turkey into a shambles. 

SwordOf TheProphet

6/25/2012 4:36:35 PM

V Tiger, so I guess the history of armenia is a long neverending "burst" of unemployment, high inflation, currect account deficit, etc.

James Denison

6/25/2012 3:26:29 PM

Having come from America and visited Spain multiple times, I see the same situation happening all over again in Turkey. I see vacant apartments everywhere and new buildings going up all over the place. It seems the only thing that we didn't have in America was this monster called TOKI. I recently saw a great film about Istanbul called ' Ekumenopolis'. In that film they said that there are close to one million vacancies in the greater Istanbul region. Sustainable???

Emre Deliveli

6/25/2012 1:16:02 PM

@DKI: As I note in the Roubini weekly ( http://bit.ly/LjXY3n ), where I summarize this column, none of these should give anyone a hear attack. All I'm saying is that we should be watching these carefully. BTW, I have a good observation on rent vs buying,which will appear later at my blog: http://www.economonitor.com/emredeliveli/

V Tiger

6/25/2012 12:10:32 PM

All indicators of high inflation,unemployment,current account deficit,huge supply of housing are same as the economic problems of the West.Suppressed bubbles eventually succumb to the pressures of reality & burst.

dogan kemal ileri

6/25/2012 11:33:32 AM

Apart from a few foreigners who have financial worries back home are renting rather than buying, all else seems tick a boo to me.
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