Atilla Yeşilada

RIP, Turkey’s housing bubble has deflated

29 August 2017

Since the 2009 recession, Turkey’s property market had been on a high-altitude flight pattern, with home price increases leading the world according to international surveys. Only two years ago, Istanbul was the second home of choice for high-flying Arab and former CIS jet-setters who loved the easy-going attitude, cosmopolitan culture and flourishing entertainment scene. Real estate developers proudly boasted that per square meter prices ought to match London and Paris in self-sponsored TV shows. Since the 2016 July coup attempt, the shine has come off the property market. The commercial segment is in an outright slump, with an estimated excess supply of 5 million square meters. In the residential segment, unit sales have been mediocre despite heaps of government incentives, while annual increases in prices are barely keeping up with inflation.

This is only the beginning, as real rates increase gradually and household disposable growth decelerates. In the next phase, the large stock of units held by investors who hold out for price appreciation might hit the market, depressing prices further.

The chart below, albeit in Turkish, is CBRT’S official home price index, which reveals how painfully the annual price increases have decelerated over the last year:

The red line stands for national prices. As of June annualized price increases decelerated to 12.74%, barely keeping up with annual CPI inflation of 11.5%. A more accurate index of house price, the Hedonic Index, which takes account of quality improvements, rose 10.8% YoY, declining in inflation adjusted terms.   According to one of the leading real estate experts in Turkey, Mr. Ahmet Karaduman, in Istanbul both house prices and rents have declined in real terms over the last 12 months.

The blue line shows home prices, the red rents. According to REIDIN, a private data collector, as of June rents in Istanbul increased by only 1.38% in nominal terms, the worst performance since the 2009 recession. Across the nation rent increases are estimated to range around 5%.

Unit sales reported by Turkstat are still OK, as shown in the chart below, but this must be put in perspective.

Since the beginning of the year the government has trimmed the VAT on new home sales, as well as providing sundry incentives on home building materials such as furnaces, etc. Moreover, State Housing Agency (TOKI) and many developers organized (discount) sales campaigns and banks were pressured to offer below-market mortgage loans.

The impact was short-lived. By late August, squeezed by a shortage of TL deposits banks were being forced to raise their mortgage loan rates, while household incomes were declining precipitously, as the chart below from GlobalSource Partners Turkey research report demonstrates:

The housing market now operates in a new and very difficult environment. First, the ambitious effort by the government to renew Turkey’s old and earthquake-prone housing stock has   reduced demand. Usually, each reconstruction permit comes with permission to build additional space, meaning that both home owners and builders can profit from the project.   The units thus produced in the inner cities sap demand from mega-projects at the suburbs and fringes. Secondly, Turkey’s real interest rates are rising permanently. The budget deficit will be expanding until the 2019 elections, putting pressure on rates, while Turkish banks and corporates have cut down on F/X borrowing, increasing the demand for domestic funds. Finally, despite rosy growth figures indicating 5% plus GDP expansion, employment and thus wage growth, as shown above have been anemic.

This picture is very unlikely to change in the coming years, as the government fails to initiate structural reforms, while CBRT is forced to stick to a tight monetary policy because of high inflation and stubborn current account deficits which threaten currency stability.

In the next phase, investors who bought on hopes of permanent price appreciation might be forced to sell, as rents decelerate and TL deposits become more lucrative. If this wave starts, builders will come under pressure and forced to sharply reduce new construction. Given their high level of leverage, some bankruptcies are a possibility.

Yet the greatest threat to Turkey’s once buoyant housing market comes from demographics. As the Syrian refugee flow subsidies, demand for new housing slumps. Population growth rate is declining despite Erdogan’s plea for 3 or more children per family. Finally, Turkey’s great migration from rural to urban areas is nearly complete, with 70% of the population now residing in the latter.

Good quality, affordable housing will always sell as young people marry and find good jobs, but the speculative frenzy is over. Housing is no longer an investment good in Turkey. And this is a good thing. There is nothing scarier than an overblown housing bubble exploding, wrecking bank balance sheets and household incomes.


Atilla Yesilada, GlobalSource Turkey Expert

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