Turkey's property watchers have been following the progress of the country's new mortgage law closely in recent days. With a draft submitted to the office of the speaker of parliament in late November, Istanbul in particular has been left abuzz with talk of what this might imply for the real estate market.
As opposed to the shorter-term loans of old which used to span 5-10 years, Turkey's new mortgage system will allow homebuyers to pay in small instalments over a long period of time, with 30-year financing plans drawn up for private homeowners.
The interest rate of the loan will take either a fixed or flexible form, depending on the contract. All this is expected to make property acquisition that much more affordable.
However, a number of conditions must be put in place before Turkey's new mortgage system really takes off. According to Emre Camlibel, the general manager of leading construction and development firm Soyak, interest rates must fall further for potential homebuyers to seek, or indeed consider, longer payback periods. For the mortgage rate to be fully functioning interest rates must drop from the current 1.2% per month to 0.5%, translating into an equivalent of 6% per year, says Camlibel. Only then, he says, would it come into line with the current rate of inflation, presently below 8%.
Then there is the question of finance, with Camlibel saying there is the need for a massive injection of revenue into the Turkish economy, and for this to be transformed into mortgage loans. Though 2005 has seen more foreign investment enter Turkey than in the last two decades combined, this trend will have to continue for the mortgage system to realise its full potential. It could be four to five years before the necessary funds become available for a mortgage boom in Turkey, according to market observers.
Culture also has a role to play, with many potential homebuyers reluctant to agree on long periods of repayment. Turks are presently not ready for the mortgage system and they will have to make a psychological shift as their natural inclination is to minimise the period of debt, says Adnan Sezgin, CEO of KC Group, a leader in Turkey's real estate and construction sector.
Others endorse the view. Zeynep Ozay, manager of the Arnavutkoy branch of real estate agent TURYAP, holds that Turkish people prefer credit terms from banks. They are hesitant to have loans extending beyond five years, wary of Turkey's roller coaster economic history, marked by high inflation.
That said, few doubt that a shift in preference towards mortgages will occur, thanks in part to the health of the Turkish economy and the associated level of consumer confidence. Despite this, Camlibel said he does not expect to see the mortgage system fully functioning until 2007, despite having faith in Turkey's economic stability.
Turkish banks nevertheless have particular confidence in the new mortgage law, having reduced interest rates for loans in a bid to seize as large a piece of the home buyers' market as possible. As of December, monthly interest rates for home loans stood at between 0.99 and 1.25%, compared with an average of 2.5% in 2004.
All this explains the magnitude of Turkey's housing boom, the reasons for which are apparent. The 2000/2001 economic crisis caused a great number of housing sales to be put on hold, with consumers either hesitant or unable to spend on property in the years that followed. But now, with inflation hitting single digits and interest rates down, investing in property is all the more appealing.
No coincidence either that other forms of investment are looking less attractive. As interest rates for government bonds have lowered, so Turks have looked to real estate as a secure form of investment. This has accompanied a shift in focus on the part of Turkey's banks, with government bonds no longer delivering high returns. As a result, banks have gone out looking to sell customer loans, aiming at young families with greater purchasing power for houses.
Meanwhile, real estate developers have been the first to respond to growing demand, with property prices shooting through the roof. In 1999 Camlibel's company sold fully equipped units in Istanbul for $437 per sq metre. Today the same units are changing hands in the secondary market at $2000 per square metre. The new mortgage system has obvious implications: long-term loans mean that the purchasing power of homebuyers will increase even further, leading to a parallel increase in the cost of accommodation over the coming years.
Property developers meanwhile have been emboldened by Turkey's new mortgage system, though Camlibel says they are careful to ensure that properties do not have question marks over ownership, regulatory difficulties, occupational permit problems and are constructed according to the recent building code with the required certificate of occupancy. This means that any property that does not meet the specified standards enshrined in the new mortgage legislation will not qualify, thus giving Turkey's big institutionalised construction and property developers something of a stranglehold on the market.
Whilst Turkey experiences a boom in real estate, that for mortgages will take more time to eventuate. Establishing confidence in the new legislation, pushing down interest rates further and bringing in foreign capital will be vital. Anchoring all of these conditions will be the continual growth of the economy, driven by reform and monetary and fiscal discipline.