Turkish real estate market faces impending crisis with credit crunch and rising rates
A looming crisis in the Turkish real estate market casts a shadow over the horizon as three major cities in Turkey have taken the international spotlight as the global leaders in housing price increases, with rates surging by a staggering 130% and more, Turkey’s Sozcu newspaper reported on Thursday.
The combination of soaring credit interest rates and tightened lending by banks is raising concerns of an impending crisis, it said.
The difficulties in accessing financing for housing are beginning to reflect in the numbers. Over the past five weeks, credit interest rates have surged by 10 percentage points, surpassing 34%, while credit utilization has stagnated at a mere 0.2%.
Representatives from the construction sector have pointed out the selective lending practices of banks and the interest rates exceeding 3%, warning that if this trend continues, the market could contract by 30%. Indeed, according to data from the Turkish Statistical Institute (TÜİK), mortgage-based home sales in July have declined by 24.1% compared to the same month in 2022, and by 28.2% in the January-July period of 2023. The real estate crisis is further exacerbated by the rising construction costs. TÜİK's building construction cost index showed a 3.83% increase from May to June and a staggering 51.80% increase compared to June 2022.
While housing prices have increased, the high inflation rate has negatively impacted purchasing power. Until recently, the monthly installments for 10-year home loans remained within the budget limits of a significant portion of the population. However, the Banking Regulation and Supervision Agency's (BDDK) regulation in February 2023 permits credit utilization ranging from 70% to 80% of the appraisal value for new homes valued between 5 to 10 million TL. While most banks offer loans above the 250,000 TL threshold, some provide financing of up to 3 million TL. Industry representatives point out that the loans provided by banks for a 5-million TL home typically hover around 1 to 2 million TL. As a result, purchasing a home becomes increasingly challenging for those without 3 million TL in cash. With monthly installments for a 2-million TL loan reaching as high as 60,000 to 70,000 TL, even the so-called "middle class" finds it difficult to manage these payments.
According to data from the property valuation platform Endeksa, the annual increase in housing prices in Turkey reached 109% as of July. The average housing price nationwide surged to 2,691,780 TL. The cities experiencing the highest increase in property value are Hatay, Ankara, and Mugla. In July, the average housing price in Istanbul rose to 3,831,240 TL, in Ankara to 2,145,130 TL, and in Izmir to 3,440,580 TL.
The Central Bank of Turkey released the Housing Price Index data for June 2023. The index stood at 920.5, marking a monthly increase of 4.8% and a yearly increase of 95.9%. Analyzing the index changes for the three major cities, Istanbul, Ankara, and Izmir saw increases of 4.0%, 5.6%, and 4.9%, respectively, in June compared to the previous month. According to the data, housing prices have been breaking records for ten consecutive months nationwide, and for six months in Istanbul, in terms of U.S. dollars.