Challenges Ahead: Turkey’s Housing Market

Yasemin Kabalci is a second year business finance student at Istanbul University. She says she’s confident she’ll get a good job one day, but that buying a home will be a lot more difficult.

“At present I am too young to buy a house but I can tell already...that houses are too costly, and you need a lot of savings,” says Kabalci, 22.

Turkey has a well-developed housing construction industry, building nearly 800,000 units per year. But for the moment, most of those are in the high-end of the market, potentially pricing a lot of people out.

This and other issues surrounding the Turkish housing market are addressed in The World Bank’s Country Economic Memorandum on Turkey.

The memorandum finds that while Turkey’s housing finance market has laudable features, such as predominance of fixed-rate local-currency mortgages and modern legislation, it is under-developed in terms of product diversity, funding channels and market penetration.

Lenders serve affluent clients with loans affordable only by the top twenty percent of urban households, the study shows.

“In the case of Turkey, we have a high number of buildings which need to be affordable, so it is important to match supply with demand,” says Orhan Vatandas, Data Analytics Manager for REIDIN, a real estate market information service operating in Turkey.

“That also applies for housing purchasing power, which is essentially governed by income and conditions, and interest rates and maturity rates for the mortgages,” he says. 

“In Turkey, the housing costs are increasing, but mortgage costs are also increasing, and that is the determining factor,” adds Istanbul University professor and housing expert, Ali Hepsen, who was involved in the World Bank report.

“The mortgage rate was 9 and now it is 12 percent, which is putting a lot of pressure on the lower and middle-income groups, making it more difficult to buy houses,” Hepsen says.

The report points to signs of market saturation which it says may result in deterioration of underwriting and servicing quality, which in turn could lead to a decline in portfolio performance and erosion of lenders’ profitability.

The currently good performance of banks’ housing loan portfolios is likely an indicator of low seasoning and focus on affluent clients.

Market deepening to middle- and low-income borrowers may present risk management challenges, the report states.

“We need to ensure land generation for the middle class,” says Makbule Yönel Maya, a General Manager at TSKB, a bank involved in Turkey’s housing industry. 

“But that is an almost impossible product, because maybe the only way of doing that is creating a land stock in the new development areas, and through a master plan and issuing zoning permits for those areas,” she says.

In parallel with increased provision of mid-market mortgage products, Turkish banks should be encouraged to diversify their funding channels away from reliance on deposits, the World Bank report advises.

However, it notes that the domestic institutional investor base appears to be thin, and that, in this regard, it is important to embrace viable capital market funding mechanisms – covered bonds and securitization –to attract not only local institutional investors but also potentially foreign ones.

“The statistics from the central bank will tell you that there is about a 20 percent increase in prices annually, but costs are also increasing, which leads you to the question who is buying in this market,” Hepsen says.

“Well, with the increasing exchange rate of about 40 to 50 percent, the Turkish lira-priced properties have become cheaper for foreigners, so there is a large amount of purchase by foreigners,” he says.

Overall, the World Bank memorandum suggests that Turkey’s housing construction and lending industries are facing developmental and stability challenges in terms of a likely exhausted paradigm of serving the top end and requiring a concerted effort by market stakeholders to deepen market penetration.

In this regard, TOKI, the government agency in charge of providing affordable housing, is the natural focal point, the report says.