Strong but slower house price growth in Turkey

October 18, 2016

Turkey´s property market continues to perform strongly, though price rises have been slowing since the beginning of 2016.

The country´s nationwide house price index rose by 13.98% (4.76% inflation-adjusted) during the year to July 2016, according to the Central Bank of the Republic of Turkey (CBRT), significantly slower growth in real terms than the 18.75% (11.18% inflation-adjusted) growth recorded during the same month last year.

  • In Istanbul, Turkey’s largest city, house prices surged by 17.68% (8.17% inflation-adjusted) during the year to July 2016.
  • In Ankara, the country´s capital, house prices were up by 9.16% y-o-y (0.34% inflation-adjusted) in July 2016.
  • In Izmir, the country´s third largest city, house prices rose by 14.71% y-o-y (5.43% inflation-adjusted) in July 2016.

Istanbul also saw the highest annual increases in newbuild housing prices, with a 15.33% (6.01% inflation-adjusted) during the year to July 2016, followed by Izmir at 11.91% y-o-y (2.87% inflation-adjusted), and Ankara at 11.55% (2.54% inflation-adjusted), according to the CBRT.

"Security concerns, Russian sanctions and mounting pressures on the lira are curtailing investment despite high demand and low supply characterising the wider property market," notes Kate Everett-Allen, Knight Frank´s head of International residential research.

However the long-term outlook of the Turkish property market is still positive despite the failed coup attempt last July. “In the long-term, Turkey is likely to remain on the radar of investors, given the underlying market fundamentals of strong demand set against low supply,” according to Everett-Allen.

From 2007 to 2011, house prices in Turkey fell by 2% (-29% inflation-adjusted), as economic growth slowed sharply to 0.7% in 2008. In 2008 existing house prices plunged 14.65% after inflation, by 2.82% in 2009, by 3.54% in 2010 and by 2.39% in 2011.

Since then, home prices have risen continuously.

Foreign ownership in Turkey is ruled by the reciprocity principle. Citizens of countries that allow Turkish citizens or legal entities to own property in their country are allowed to acquire property in Turkey. Citizens of most EU countries (except for Belgium, Cyprus, Czech Republic and Slovakia), the United States, Canada and other countries in Asia, Latin America and Africa can freely purchase properties in Turkey.

Primary market: mid-sized house prices rising faster

Based on the REIDIN´s Gyoder New Home Price Index, new home prices have risen by 69.3% since January 2010. Houses measuring 101-125 sq. m. have experienced the highest price increases, rising by 74.8%.  The REIDIN-GYODER New Home Price Index is calculated monthly, and covers 70 projects and about 22,500 properties, presented by 29 developers.

REIDIN-GYODER New Home Price Index, August 2016

Type of Houses  Y-O-Y change (%)  Change from base period (%) (Jan 2010 = 100)
New Home Index 4.89% 69.30%
51-75 sq. m. 5.98% 64.90%
76-100 sq. m. 4.26% 64.10%
101-125 sq. m. 3.55% 74.80%
126-150 sq. m. 5.62% 70.90%
>150 sq. m. 2.54% 49.50%
Source: REIDIN

Home sales decline slightly

Turkey house sales

Dwelling sales in Turkey increased 10.6% to almost 1.3 million units in 2015, but fell back by around 2% y-o-y in the first eight months of 2016, according to the Turkish Statistical Institute (TurkStat).

Sales to foreign investors, of course a much smaller number, fell by 17.3%.

Foreign buyers became significant when the government eased its foreign property regulations in 2012. In 2015, the total number of houses sold to foreigners rose by 20.4% to 22,830 units. Most home purchases by foreigners occurred in Istanbul, with 7,493 sales, followed by Antalya (6,072 sales) and Bursa (1,501 sales).

Construction activity is up

Construction permits for dwellings rose during 1H 2016 by 16.2% to 499,053 units, according to the Turkish Statistical Institute (TurkStat). In 2015 dwelling permits had actually fallen, with permits for two or more dwelling residential buildings down by 13.95%, as the market focused on selling current stocks.

Turkey dwellings permits

The new property law

In 2002, the Turkish property market was first opened to foreign buyers, but they were only allowed to purchase properties in a few zones, and under the "reciprocity clause" only nationals of countries allowing Turkish citizens reciprocal rights - like Britain, Germany and the Netherlands - were allowed to buy properties.

In 2005, the zones were abolished but reciprocity remained.

Then in May 2012, the government passed a bill ending the reciprocity requirement, to attract more foreign homebuyers. Since August 2012, the government has allowed nationals from 183 countries to buy properties in Turkey. In addition, the size of land foreigners can buy without needing special permission was increased from 2.5 hectares, to 33 hectares.

Nationals of China, Russia, India and of Gulf Arab states, previously banned because of the reciprocity rules, are now allowed.

Since then, tens of thousands of foreigners have successfully acquired properties in Turkey, most notably in the Marmara and Mediterranean regions, Turkey’s major finance and tourist hubs. In 2015, Turkey´s Foreign Direct Investment (FDI) inflow was at US$ 16.5 billion, 24.8% of the total FDI (or US$ 4.1 billion) was for real estate and construction, according to the Investment Support and Promotion Agency of Turkey (ISPAT).

Housing loans continue to expand; rates are slightly up in recent years

Turkey interest rates

Housing loan interest rates have fallen enormously, from about 48.43% in 2002, to just 9.7% in 2013. This has been one of the great successes of Turkey’s AKP government.

This led to a sharp rise in outstanding housing loans, despite periods when the economy was weak. Over the past decade, housing loans expanded from around 1.91% of GDP in 2005 to around 6.58% of GDP in 2015. Housing loans increased by an average of 27.9% annually from 2006 to 2015.

Turkey Housing loans

In 2014 the average interest rate for housing loans rose again, and by September 23, 2016, the average interest rate was 12.07%.  In September 2016, the CBRT´s benchmark one-week repo rate was still at 7.5%.

Rental yields in Istanbul are declining

Rental yields in Istanbul have been declined significantly over recent years due to economic pressures, as well as the rising trend of dwellings prices. Gross rental yields in Istanbul are currently poor to moderate, ranging from 3.28% to 6.21% based on the Global Property Guide research in March 2016.

  • In one of Istanbul´s attractive districts, Besiktas, a 120 square metre (sq. m.) apartment can yield by around 3.28%, down from a 5.02% yield for the same-sized apartment in 2013.
  • In the Bakirkoy district, a 120 sq. m. apartment has a rental yield of 3.71%, significantly lower than 4.45% three year ago.
  • In Beyoglu, a more ´work oriented´ district, gross rental yields for a 50 sq. m. apartment were down to 6.21% from 6.63% in 2014. 120 sq. m. apartments had bigger decline in rental yields to 3.79%, from 5.09% two years ago.
  • In the Kadikoy district, rental yields for a 120 sq. m. apartment slightly fell to 4.03% from a rental yield of 4.34% in the previous year.
  • In the Sisli district, gross rental yields for 120 sq. m. apartments actually rose to 5.48% from 4.03% in 2015. 

Turkish lira hit record lows; credit rating downgrades from S&P and Moody´s

Turkey exhange rate

The Turkish Lira fell to an all time low of TRY 3.09 against the US dollar on July 20, 2016, down by 14.5% from last year. As of October 3, 2016, the exchange rate closed at TRY 3.0187 = US$ 1.

A major reason for the currency´s depreciation is the political turmoil in Turkey - the political risk brought by the failed coup attempt last July, which prompted the government to declare a state of emergency, led to a credit rating cut from two rating agencies. Standard & Poor´s (S&P) cut Turkey´s credit rating to ´BB´ with negative outlook in July 2016. Two months later, Moody´s Investor Service downgraded the country´s credit rating to ´junk´ status, cutting the government´s long-term issuer and senior unsecured bond ratings from Baa3 to Ba1, but maintained the country´s stable outlook stating that Turkey´s "large and flexible economy" as well as its strong fiscal record, offset the "erosion in Turkey´s economic resilience and increasing balance of payments pressures".  

Another reason is the end of the period of rapid economic growth. Growth slowed sharply after the Eurozone crisis hit to 3.3% annually from 2012 to 2015, down from 9.2% and 8.8% in 2010 and 2011.

Another reason for the Lira´s weakness was the general weakening of developing country currencies. A final reason is the chaos on Turkey´s doorstep in Syria and Iraqi Kurdistan, and the deterioration in relations with Turkey´s own Kurdish population.

Political uncertainty ensues after a failed coup attempt

In the parliamentary elections on June 7, 2015 the Justice and Development Party (AKP) lost its majority, after 13 years in power. However, after coalition negotiations between the governing AKP and the opposition broke down, a snap election was called by President Recep Tayyip Erdoğan.

The snap election on November 1, 2015 resulted in a ´shock´ victory for the AKP, which regained its parliamentary majority, winning 49.5% of the votes and 317 parliamentary seats. The Republican People´s Party (CHP) gained 134 seats, the People´s Democratic Party (HDP) 59 seats, and the Nationalist Movement Party (MHP) 41 seats.

Although President Erdoğan´s AKP won the majority, it still has 14 seats too few to call a referendum to change the constitution and boost the president´s powers.

In its early years, Turkey’s AKP government was seen internationally as the Islamic equivalent of Europe’s Christian Democratic parties, i.e., a force for moderation and modernity. The AKP was credited with bringing economic growth and political stability to Turkey. EU membership was one of the government’s top priorities. In September 2010 it won public approval for its plans to amend the constitution, partly to meet the requirements for EU membership, but above all to reduce further the power of the military.

However in recent years President Erdoğan has become increasingly authoritarian. Many journalists are in prison, violence against demonstrators is common, a bizarre purge of the military and of those associated with the Gülen movement has undermined judicial independence, and Erdoğan himself has been implicated in a wide-ranging corruption scandal.

The resignation of Prime Minister Ahmet Davutoğlu from his post in May 2016 heightened the concern regarding President Erdoğan´s authoritarianism. Such move brought President Erdoğan´s aim to move Turkey to a presidential system an inch closer, as Davutoğlu was replaced by a known Erdoğan loyalist, former transport minister Binali Yıldırım.

In July 2016, President Erdoğan´s government was tested by a coup attempt by the faction within the Turkish Armed Forces, the "Peace at Home Council". It took over some key areas in Ankara and Istanbul and forced media outlets off the air. However, the coup was suppressed by military forces loyal to the state. The coup left 300 people dead, more than 2,000 others injured, and more than 6,000 people arrested.

The government linked the failed coup to President Erdoğan´s rival Fethullah Gulen, a Muslim cleric and  Erdoğan´s rival who leads a popular movement known as Hizmet. Gulen, who currently resides in Saylorsburg, Pennsylvania after moving to the United States in 1999, denied the accusation.

A few days after the coup, President Erdoğan announced a three-month state of emergency. A series of purges has followed, with many arrests, and many firings, targeting people allegedly affiliated to Gulen´s movement, but in fact spreading much wider. 

Economy to expand in 2016 amidst uncertainty

Turkey gdp inflation

Turkey saw a 3.1% increase in GDP during the year to Q2 2016, according to TurkStat. Private consumption rose robustly, expanding by 6.8%. Meanwhile, political uncertainty caused fixed investment to contract by 0.6% y-o-y. The economy is expected to grow by 3.8% in 2016, almost the same as in 2015, according to the IMF.

In September 2016, inflation eased to 7.28%, the lowest rate since May 2016. However, it is still above the central bank´s target of 5%. In the first eight months of 2016, the government had a budget surplus of TRY 4.9 billion (US$ 1.64 billion), according to Finance Minister Naci Ağbal.

Unemployment was at 10.2% in June 2016, an increase of 0.6 percentage points from last year´s 9.6%, according to TurkStat. The labour force participation was virtually unchanged at 52.4%, slightly up from 52.1% in the previous year.

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