Another “in house” crisis for Turkey: Real estate prices

CAN BURGAZ- Real estate prices are rising around the world. Turkey finds itself in a unique position in this matter. According to the Knight Frank Global House Price Index’s third quarter data from 2022, the country with the highest increase in real estate prices in the world was Turkey. The increasing real estate prices have made it impossible for people to live in metropolitan cities. Those working with fixed salaries, especially civil servants, want to be transferred from larger cities to small ones.

Turkey’s economic and political policy has played a role in this rise in property prices. Where inflation has reached 80% in the past few months in the country, the price of almost every consumer item has increased and real estate prices have increased even beyond that. Significant social shocks will be experienced if a solution to the problem is not found.

Real estate prices according to indices

International property consultancy firm Knight Frank announced its list of countries with the highest increase in housing prices. According to the Global House Price Index’s 2022 third quarter data which covers 56 countries and regions, during the January-September period of 2022, compared to the same period of the previous year, with a 189% increase, Turkey was the country with the highest increase in housing prices. While this figure was 27.3% for Estonia, in second place, the increase rate for the third place Hungary was 23.7%. Even when inflation is taken into account, the rate of increase in Turkey was 57.6%. While Turkey ranks first in this regard, the country closest to this rate was Israel with 13.2%.

According to the Sahibindex report prepared by the Bahcesehir University Center for Economic and Social Research (BETAM) and the online real estate sales site sahibinden.com, the annual rate of increase in the average square meter price of rental houses in Turkey was 168 percent in November. In the three largest cities of Turkey, the annual rent increase rate was 147.7 percent in Istanbul, 150 percent in Ankara and 160 percent in Izmir, respectively.

While inflation was over 80% in 2022, we closed the year with 64.27% in inflation due to the decline in December. The rate of increase in the indices is well above the inflation rate. Therefore, there are dynamics specific to Turkey that cannot be explained solely by inflation rates or global trends.

Causes for the increase

Due to President Recep Tayyip Erdogan's unorthodox monetary policy, Turkey has entered a currency and inflation crisis. There are almost no products that did not get their fair share from this price increase crisis. However, some products increased at a higher rate than others due to the problems in the global supply chain.

According to the construction cost index announced by TURKSTAT, the annual increase was 103.47%. The increase in construction materials, which is above the inflation rate, leads to an increase in construction costs. Construction companies do not build new homes because they cannot cope with the rising costs. This leads to an inability to meet the needs of an increasing population and a demand for real estate, especially in big cities.

The monetary policy imposed by Erdogan on the Central Bank was another factor that caused real estate prices to skyrocket. As the interest rates were lowered and the earnings of other investment instruments remained below the inflation rate, capital owners resorted to home purchases, which they believed would bring good returns in the long run. People spent their money on buying a house rather than depositing it in the bank or buying foreign currency. This was reflected in the real estate prices by an increase in demand. Economist Mahfi Egilmez wrote in an article published on his blog, “People tended to prefer house purchases even though these are constantly increasing in price, rather than incurring losses by making deposits or investing their money in government bonds. In addition to those who have money, those who do not have money also chose to use loans and buy housing, aiming to benefit from the increasing prices in the future.”

Another issue is the refugee and citizenship policy implemented by the government. Turkey hosts millions of refugees from Syria. Not only Syrians, but also Afghans and many people from other Asian countries have flocked to Turkey. This also exerts pressure on real estate prices.

One of the ways the government is attempting to bring in money from abroad to combat the currency crisis is by granting citizenship through real estate purchases. Foreigners who purchase real estate for 250 thousand dollars (later increased to 400 thousand dollars) are able to acquire citizenship in the Republic of Turkey. This caused many people, especially from non-democratic countries, to buy homes in Turkey and apply for a passport of the Republic of Turkey. Since a significant part of these houses bought for investment purposes, were not rented out and were left unoccupied, they caused an increase in real estate and rental prices.

This crisis also caused a significant social shock in Turkey. Civil servants from big cities are requesting to be appointed to smaller cities. There is great tension between landlords and tenants. Buying a home by working has become an unattainable dream for middle class and white-collar workers. The government has adopted several precautions as a result. For example, rent control has been imposed and the rate of increase has been capped at 25%. However, in practice, there is no mechanism to monitor this, and landlords continue to ask for rents well above this rate.

Expert opinions: This crisis is specific to Turkey

Economic journalist Baris Soydan writes that the increase in real estate prices is entirely a result of economic policies. Soydan says that in addition to housing prices, citizens who would normally buy houses are now renting, and that when the demand for rentals increases, rent prices do as well. Soydan writes, “The interest rate cuts of the Central Bank had caused the TL to melt. When the dollar increased from 4.5 TL to 15 TL, the price of construction materials kept increasing as well to the point that it was impossible to fund new projects, as it was difficult to tell whether residences made with overpriced materials could be sold or whether a profit could even be made if they were sold considering the constantly increasing prices of construction materials. What happens if the supply of something decreases while the demand for it remains constant? Yes, the price goes up. Another introductory course in economics. As we have seen, there is almost no relationship between the explosion of housing prices and rents and the price increases in the world. This inflation is homemade,” he says.

Cheap housing loans put in place by the government to prevent this are also criticized by experts. Journalist Alaattin Aktas underlined that this is not the solution in his article in the prominent economy publication, Nasil Bir Ekonomi. Aktas wrote: “Let's say this package is amazing, it will give very good results, people will be buying homes in a happy-go-lucky manner. Fine, but is this our problem, at this stage? Is home ownership where we should be channeling resources? Allocating 20 billion liras to contractors for unfinished houses? If inflation is going to slow down when we do this, then okay! When we do this, if workers, civil servants, retirees, tradesmen will take a deep breath and live comfortably, then okay! If unemployment will decrease when we do this, then okay! If the pressure on the currency is going to stop when we do this, then fine! But none of these are going to happen, though these are the problems we should be focused on solving.”

The real estate crisis is also affecting people's lifestyles. In a statement to Deutsche Welle's Turkish news site, real estate appraiser Dr. Ahmet Buyukduman said that due to the crisis, home sharing with family and friends will increase. Buyukduman said, "The whole era of ‘let’s get married, let’s live in 100 or 120 square meter homes, let’s live independently in the city center’ has come to an end. You will see, people are going to have to move into 60 - 70 square meter homes, they are going to have to move back in with their families. What I mean is that the houses we live in are going to get smaller and we are going to have to move away from urban centers. And the industry is going to start constructing smaller homes anyway.”