The adoption of Turkey's first ever mortgage law in February 2007, one of the most important reforms of the finance sector, was met with considerable fanfare. Though excluding favourable terms for taxation, the new system promises to help Turkey's well- to-do home-seekers afford housing that was once beyond their reach. A real mortgage boom though will require a reduction in national interest rates.
Home-seekers were disappointed to hear about the government's last minute decision to remove tax incentives from the law, thus dampening appetites amongst potential consumers in the short-term. The decision not to make mortgages deductible from tax was not surprising, as Turkey is seeking to widen its tax base and reduce the size of the unregistered economy.
"The biggest problem the government faces is collecting taxes, so I do not expect a revision of the mortgage law in the near future," Ilgin Erdogan, an equity research manager at AK Securities, told OBG.
The tax question is not expected to seriously affect the success of the mortgage system however. High interest rates figure more prominently in the minds of Turkish home-seekers. Turkey's middle and lower income earners are waiting for optimal market conditions before putting pen to paper.
"Now interest rates are around 1.5% for long term loans, but the figure must fall beneath 1% to attract home-seekers," confirmed Teoman Metehan, the CEO of Teknik Yapi, a contractor and land developer.
A reduction in interest rates is not expected in the immediate future, according to market analysts.
Whether loan seekers eventually decide to contract a variable-rate mortgage or a fixed-rate loan, depends very much on their own perception of the economy and where it is going. Those who are risk-averse may opt for the fixed interest rate, while economic optimists may decide on the variable arrangement, hoping to capitalise on interest rates if and when they arise. Even the variable-rate mortgages will have an upper limit, offsetting the potential costs of high inflation and interest rates.
The vast majority of Turks can only dream of pondering such decisions given their modest means. On the other hand, Turkey's well-off home-seekers find themselves in an altogether different situation. "The expectation is that real estate prices will increase due to the mortgage law, so the high end is still trying to pre-empt the price rise and acquire property now," said Metehan.
In the meantime, Turkey's business community is relishing the effects of the new mortgage law. "Once it takes off it's going to be the single largest driver in absolute terms of retail loan growth for the next five to ten years," said Credit Suisse analyst Yavuz Uzay. Once interest rates are down, the mortgage law is expected to spur competition and growth between Turkey's banks, offering a wide range of mortgage-related products.
The power of the Central Bank will also be increasingly felt by Turkey's population, as interest rates and inflation are reflected in mortgage payments and household bills. This is a country where homeownership is important, with 70% of families already owning their own homes.
Meanwhile, the government will be able to record all real estate transactions under the new mortgage law - whether a mortgage is involved or not. This implies better visibility for the real estate market as a whole.
Yet, the government has not put its money where its mouth is. "There is no government guarantee regarding mortgage bonds. If there were, it would reflect the government has full trust in the mortgage initiative. Or it might simply reflect a perception [in government] that land is enough of a guarantee on its own," concluded Metehan.