Turkey's housing market recovering remarkably, but outlook is now uncertain
Lalaine C. Delmendo | June 26, 2020
The country’s nationwide house price index soared by 15.01% during the year to Q1 2020, according to the Central Bank of the Republic of Turkey (CBRT), a sharp acceleration from y-o-y increases of 9.93% in Q4 2019, 6.62% in Q3, 1.74% in Q2 and 3.2% in Q1. However in real terms, the house price growth is far more modest, at 2.82% during the year to Q1 2020, due to persistently high inflation in the country. Yet this remains the first y-o-y growth in real prices since Q1 2017.
On a quarterly basis, nationwide house prices increased 5.6% in Q1 2020 (3.24% inflation-adjusted).
The price index for new dwellings rose by 18.77% during the year to Q1 2020 (6.18% inflation-adjusted), according to CBRT, while the price index for existing dwelling increased 14.25% (2.13% inflation-adjusted).
In Turkey’s major cities:
- In Istanbul, Turkey’s largest city, nominal house prices rose by 11.71% during the year to Q1 2020. But when adjusted for inflation, house prices were actually down slightly by 0.14% y-o-y.
- In Ankara, the country’s capital, house prices rose by 14.85% y-o-y in Q1 2020 (2.67% inflation-adjusted).
- In Izmir, the country’s third largest city, house prices went up by 16.36% y-o-y in Q1 2020 (4.02% inflation-adjusted).
Istanbul hasTurkey’s most expensive housing, with an average house price of TRY 5,221 (US$ 765) per square metre (sq. m.) in Q1 2020, according to the CBRT. Nationwide, the average house price was TRY 3,104 (US$ 455) per sq. m.
Demand has partly been buoyed by a surge in foreign buyers. In the first four months of 2020, the total number of home sales in Turkey rose by 8.9% to 383,821 units from the same period last year, following declines of 1.9% in 2019 and 2.4% in 2018, according to Turkish Statistical Institute (TurkStat).
For foreigners, the currency’s devaluation means that the property market is very attractively priced, luring many buyers from the Gulf. In 2019, foreign home purchases rose by almost 15% to 45,967 units from a year earlier, following strong growth of 78.5% in 2018 and 22% in 2017.
In the first quarter of 2020, Turkey’s economy expanded by 4.5% from a year earlier, following y-o-y growth of 6% in Q4 2019 and 1% in Q3, according to TurkStat. Despite this, the economy is projected to contract by 5% this year, according to the International Monetary Fund (IMF), due to the lockdowns and travel restrictions imposed since reporting its first COVID-19 case in March 10, 2020.
In 2019, Turkey’s economic growth slowed sharply to 0.9% from a year earlier, following expansions of 2.8% in 2018, and 7.5% in 2017, mainly due to weak lira, high borrowing costs and global economic uncertainty.
Istanbul’s streets and shops are full of Gulf tourists - and they’re buying property
Foreign buyers are now buying large amounts of Turkish property, mirroring the substantial increase in Gulf tourism. As the Lira has fallen visitors have been attracted to Turkey and Istanbul is now so full of Arab visitors that it resembles a Gulf city, with Arabic spoken in shops, and restaurants catering to Gulf tastes.
In 2019, foreign home purchases rose by almost 15% to 45,967 units from a year earlier, following strong growth of 78.5% in 2018 and 22% in 2017, according to Turkish Statistical Institute (TurkStat). Irans and Iraqis accounted for almost one-third of the total foreign purchases last year.
“Iranians regard Turkey as an important and safe haven,” said Faruk Akbal of real estate investment company Nevita International. “They also feel culturally close to the country.”
Most foreign buyers bought dwellings in Istanbul, accounting for 45.9% of the total sales in 2019, followed by Antalya (19.7%), Ankara (5.6%) and Bursa (4.9%).
The strong growth in the number of property sales to foreign buyers in recent years was mainly due to robust tourism.
However this year is unusual because of the COVID-19 pandemic, with tourism and travel all over the world grinding to a halt. As expected, foreign home purchases in the first four months of 2020 fell by 12% y-o-y to 11,864 transactions, based on TurkStat figures. But the continued decline in Turkish lira’s value against the US Dollar is expected to help encourage more foreign purchases of real estate during the remainder of the year.
Foreign homeownership rules eased
It was only in 2002 that the Turkish property market was first opened to foreign buyers. But they were only allowed to purchase properties in a few zones, and under the “reciprocity clause” only nationals of countries allowing Turkish citizens reciprocal rights - like Britain, Germany and the Netherlands - were allowed to buy properties. In 2005, the zones were abolished, but reciprocity remained.
The reciprocity requirement was abolished in August 2012, and since then nationals from 183 countries have been allowed to buy properties in Turkey. Nationals of China, Russia, India and of Gulf Arab states, previously banned because of the reciprocity rules, are now allowed. The size of land foreigners can buy without special permission was increased to 33 hectares, up from 2.5 hectares.
Tens of thousands of foreigners have successfully acquired properties in Turkey, most notably in the Marmara and Mediterranean regions, Turkey’s major finance and tourist hubs.
“The regulation easing requirements for foreigners to acquire Turkish citizenship, the volatility in the Turkish lira against other currencies and the VAT exemption for foreigners helped spur the sales,” said Melih Tavukçuoğlu, head of Istanbul’s Asian-side Contractors’ Association.
Turkey has granted citizenship to foreigners through various means since January 2017, which includes purchasing property worth at least US$ 1 million. New regulations were introduced in September 2018 cutting the investment amount required for Turkish citizenship:
- Purchasing real estate worth at least US$ 250,000 now gives you citizenship.
- Or a fixed capital investment of US$ 500,000
- Or keeping at least US$ 500,000 in a Turkish bank account for a minimum of three years, down from the earlier cap of US$ 3 million;
- Or generating 50 jobs, down from 100 jobs.
In 2017, the government introduced other measures to entice foreign home buyers:
- Reduction of Land Registry’s title deed fees from 2% to 1.5%, which are payable by both the buyer and the seller (or around 3% in total).
- VAT exemptions for property owners who buy a Turkish property but do not live in Turkey, on a condition that they pay for the property with foreign currency. Home buyers must also hold the property for 12 months after purchase.
- Stamp duty for “promise to sell agreements” reduced to 0%, from 0.95%.
Treasury and Finance Minister Berat Albayrak also announced a set of tax cuts, which became effective on November 1, 2018:
- VAT on housing sales and on the furniture sector was cut from 18% to 8%, until December 31, 2019.
- The lower title deed fees rate from 4% to 3% (1.5% for seller and 1.5% or buyer) will continue until December 31, 2019.
- The suspension of special consumption taxes on domestic appliances continues until June 30, 2019.
- Special consumption tax rates for motor vehicles with engines under 1600cc are reduced to 15%.
- Reduction of all VAT rates for commercial vehicles from 18% to 1%.
Demand is rising
Surprisingly, the total number of home sales in Turkey rose by 8.9% to 383,821 units in the first four months of 2020 from the same period last year, following declines of 1.9% in 2019 and 2.4% in 2018, according to Turkish Statistical Institute (TurkStat).
In the first four months of 2020:
- In Istanbul, which has an 18.2% share of transactions, home sales rose by 8.8% y-o-y to 69,872 units.
- In Ankara, which accounted for a market share of 11%, the number of home sales surged 24.3% y-o-y to 42,224 units.
- In Izmir, which represented 6.4% of the market, home sales soared 21.3% y-o-y to 24,545 units.
- In Antalya, which captured 5.1% share, the number of home sales rose by 12.5% y-o-y to 19,633 units.
- In Bursa, which took 3.7% of the market, home sales increased slightly by 1.3% y-o-y to 14,109 units.
“There is a cautious approach to investment right now. However, we are in the most appropriate time frame in terms of prices,” said Ahmet Erkurtoğlu, deputy chairman of Anatolian Side Building Contractors Association (AYİDER).
Imposition of luxury housing tax postponed
Last year, the government introduced the luxury housing tax and other tax measures, to be effective this year, in an effort to contain the growing budget deficit which surged more than 70% y-o-y to TRY 123.7 billion (US$ 18.14 billion) last year. However recently, the Turkish government decided to postpone the imposition of the luxury housing tax for one year to 2021.
The luxury housing tax is imposed for residential houses in Turkey with a value of over TRY 5 million (US$733,000). The taxable base is the value of the property for real estate tax purposes. The following table shows the revised tax rates:
|HOME VALUE||TAX RATE|
|Below TRY 5 million||Exempt|
|TRY 5 million to TRY 7.5 million||0.3% of the amount exceeding TRY 5 million|
|TRY 7.5 million to TRY 10 million||TRY 7,500 + 0.6% of the amount exceeding TRY 7.5 million|
|Over TRY 10 million||TRY 22,500 + 1% of the amount exceeding TRY 10 million|
There are some exemptions. Those who own only one residence will not be subject to the said tax. Moreover, those who own more than one real estate qualified as their residence will not be subject to the luxury housing tax on their residence with the lowest value.
Istanbul’s rental yields are poor
Gross rental yields in Istanbul are poor, ranging from 1.81% to 4.71%, based on Global Property Guide research. Poorer districts have higher rental yields than richer districts, and in these districts rental yields can be above beyond 4.5%.
- In Besiktas, one of Istanbul’s most attractive districts, rental yields range from 1.93% to 2.81%.
- In the Bakirkoy district, rental yields range from 2.2% to 3.56%.
- In Beyoglu, a more ‘work oriented’ district, gross rental yields range from 3.06% to 4.71%.
- In Kadikoy, apartment rental yields range from 3.26% to 4.04%.
- In the Sisli district rental yields range from 3.04% to 4.62%.
- In the Sariyer district rental yields range from 1.81% to 3.24%.
Mortgage loans rising again, interest rates falling gradually
After a quick pause in 2018, Turkey’s residential mortgage market is expanding again. In the first quarter of 2020, outstanding housing loans rose strongly by 13.8% to TRY 195.27 billion (US$ 28.66 billion) from a year earlier, following a 5.9% growth in 2019, based on figures from the Central Bank of the Republic of Turkey (CBRT).
One of the main reasons is falling interest rates. In April 2020, the weighted average interest rate for housing loans stood at 11.49%, down from 19.35% a year earlier and 14.92% two years ago.
Over the past twelve years, housing loans in Turkey have increased from about TRY 12.4 billion (US$ 1.82 billion) in 2005 to TRY 178.4 billion (US$ 26.19 billion) in 2017, or by an average of almost 26% annually from 2006 to 2017.
As a result, the size of the residential mortgage market grew from just 1.84% of GDP in 2005 to 5.7% of GDP in 2017. Yet it contracted back to 4.7% of GDP in 2018 and to 4.4% of GDP in 2019.
Turkey’s currency and debt crisis
Between 2012 and 2016 the Turkish market surged, largely due to the rising middle class gaining access to mortgage finance for the first time, says Kate Everett-Allen, Knight Frank’s head of International residential research.
Before that, house prices in Turkey had fallen 14.65% (after inflation) during the global crisis of 2008, then by 2.82% in 2009, by 3.54% in 2010, and by 2.39% in 2011.
House price rises started slowedafter the 2016 coup attempt due to economic and political turmoil, including terrorist attacks and political uncertainty. Istanbul’s prime market particularly suffered in 2016, mostly due to the sharp depreciation of the Turkish Lira. The slower pace of house price rises continued in 2017 and 2018.
However President Recep Tayyip Erdogan, in response to multiple crises, continually expanded the Turkish economy. He needed to generate a feel-good atmosphere to change the constitution in 2017, and to win the presidential election in 2018. But putting his foot on the economic accelerator caused problems - an overheated economy, high inflation, a current account deficit, a debt build-up, and a currency decline - which have recently required tough measures from the central bank. High interest rates and economic restraint have had the impact on the economy which they always do, and one result has been a decline in real estate prices.
President Erdogan has long held eccentric views on monetary policy, believing that inflation is caused by high interest rates which he has dubbed the "mother and father of all evil". His views cowed the monetary authorities, and the result has been inflation, pushing the lira down.
This is ironic because Erdogan’s period in office began with a conspicuous display of fiscal orthodoxy, causing housing loan rates to decline sharply from an average of 48.43% in 2002 to just 9.7% in 2013 - one of the great successes of Turkey’s AKP government. However as inflation took off housing loan interest rates started to rise again to double digits and by December 2018, the average interest rate was 27.39%.
Rising inflation sapped the currency, but the lira’s sharp nosedive in September 2018 was partly attributable to Turkey’s worsened relationship with the US, which raised import tariffs on Turkish steel by 50% and on aluminium by 20% in protest at the detention of American pastor Andrew Brunson, who is facing charges in relation to the failed coup attempt in 2016. The Turkish Lira plunged to a record low of TRY 6.3 per USD 1 in September 2018, from TRY 3.48 per USD 1 a year ago. The lira had by then lost more than 40% against the US dollar since the beginning of 2018.
The trade dispute intensified investors’ fears. Turkey has amassed a large amount of foreign-currency debt due to years of current account deficits, but does not have sufficient reserves to support its liabilities. The current account deficit widened from US$33.1 billion in 2016 to US$47.5 billion in 2017, a surge of almost 44%, according to the CBRT.
The current account balance in fact recorded a surplus of US$1.67 billion in 2019, its first and highest surplus since 2001, largely due to the lira’s decline. However, the current account balance is expected to return to deficit again this year, as the COVID-19 pandemic hit exports and tourism revenues. In April 2020, the deficit widened sharply to US$ 5.06 billion, from US$0.47 billion in the same month of the previous year.
Amid the Turkish Lira’s “extreme volatility” credit ratings agency Standard & Poor’s (S&P) lowered the country’s credit rating from “BB-” to “B+” in August 2018. Moody’s also downgraded Turkey’s credit rating from “Ba2” to “Ba3” the same month andfurther to “B1” in June 2019 with a negative outlook. In July 2019, Fitch Ratings had cut its rating from “BB” to now “BB-”.
In May 2020, the Turkish lira plunged further to TRY 6.93 per USD 1, more than 36% drop from its value two years ago, after the country’s central bank announced new restrictions on foreigners making lira-denominated transactions in an effort to prevent speculation and short-selling.
Turkey’s economy to contract this year
In the first quarter of 2020, Turkey’s economy expanded by 4.5% from a year earlier, following y-o-y growth of 6% in Q4 2019 and 1% in Q3 and annual declines of 1.6% in Q2 and 2.3% in Q1, according to TurkStat.
During the year to Q1 2020:
- Household consumption rose 5.1%, a slowdown from the previous quarter’s 6.8% growth
- Fixed investment fell 1.4%, following a contraction of 0.6% in the previous quarter
- Government spending grew 6.2%, after expanding 2.7% in the prior quarter
- Exports dropped 1% while imports jumped 22.1%
However the economy is estimated to have contracted sharply in Q2 2020, mainly due to the lockdowns and travel restrictions imposed since reporting its first COVID-19 case in March 10, 2020. The World Bank expects the Turkish economy to contract by 3.8% in 2020, but the IMF released more pessimistic figures, projecting a 5% decline this year.
In 2019, Turkey’s economic growth slowed sharply to 0.9% from a year earlier, following expansions of 2.8% in 2018, 7.5% in 2017, 3.2% in 2016, 6.1% in 2015, 5.2% in 2014 and 8.5% in 2013, according to the International Monetary Fund (IMF). The sharp economic slowdown was mainly due to “the weaker lira, higher borrowing costs, and elevated uncertainties weigh on investment and demand,” the IMF noted.
Turkey’s inflation remains stubbornly high, mainly due to the continuous weakness of the Turkish lira (TRY). In May 2020, annual inflation stood at 11.39%, slightly up from 10.94% in the previous month but sharply down from 18.71% a year earlier, according to TurkStat. Inflation was 15.2% in 2019, from 16.3% in 2018 and 11.1% in 2017, according to the IMF.
Unemployment dropped to 13.2% in March 2020, from 13.6% in the previous month and 14.1% a year earlier, according to TurkStat.
- Residential Property Price Index (RPPI) (2017=100)(Monthly)(Central Bank of the Republic of Turkey):https://evds2.tcmb.gov.tr/index.php?/evds/serieMarket/collapse_26/5949/DataGroup/english/bie_hkfe/
- House Sales Statistics (Turkish Statistical Institute): http://www.turkstat.gov.tr/PreTablo.do?alt_id=1056
- Property sales in Turkey up 33% in Q1 as sales with mortgages boom (Daily Sabah):https://www.dailysabah.com/business/economy/property-sales-in-turkey-up-33-in-q1-as-sales-with-mortgages-boom
- Iranians lead foreign purchases of Turkish homes in Q1 (Daily Sabah): https://www.dailysabah.com/business/economy/iranians-lead-foreign-purchases-of-turkish-homes-in-q1
- Tourism Statistics (Turkish Statistical Institute): http://www.turkstat.gov.tr/PreTablo.do?alt_id=1072
- Building Permits Statistics (Turkish Statistical Institute): http://www.turkstat.gov.tr/PreTablo.do?alt_id=1055
- Building Permits, January-March, 2020 (Turkish Statistical Institute): http://www.turkstat.gov.tr/PreHaberBultenleri.do?id=33780
- Turkey enacts law introducing new taxes and amending various tax laws (EY Tax Insights): https://taxinsights.ey.com/archive/archive-news/turkey-enacts-law-introducing-new-taxes-and-amending.aspx
- Turkey’s new tax measures Tax bulletin - 2019/14 (PWC): https://www.pwc.com.tr/en/hizmetlerimiz/vergi/bultenler/2019/turkey-s-new-tax-measures.html
- Turkey amends Luxury Housing Tax provisions (EY Tax Insights): https://taxnews.ey.com/news/2020-0423-turkey-amends-luxury-housing-tax-provisions
- Turkey: Valuable Housing Tax Has Been Postponed To 2021 (Mondaq): https://www.mondaq.com/turkey/property-taxes/901578/valuable-housing-tax-has-been-postponed-to-2021
- World Economic Outlook Database, April 2020 (International Monetary Fund): https://www.imf.org/external/pubs/ft/weo/2020/01/weodata/index.aspx
- Weighted Average Interest Rates For Banks’ Loans (Central Bank of the Republic of Turkey): https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Statistics/Interest+Rate+Statistics/Weighted+Average+Interest+Rates+For+Banks+Loans/
- Monthly Money and Banking Statistics(Central Bank of the Republic of Turkey):https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Statistics/Monetary+and+Financial+Statistics/Monthly+Money+and+Banking+Statistics/
- Istanbul now much less expensive in dollar terms (Global Property Guide): https://www.globalpropertyguide.com/Europe/Turkey/Rental-Yields
- Consumer Prices (Central Bank of the Republic of Turkey): https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Statistics/Inflation+Data
- Labor Force Statistics(Turkish Statistical Institute): http://www.turkstat.gov.tr/PreTablo.do?alt_id=1007
- Turkey´s current account deficit at 10-year-low (A News): http://www.anews.com.tr/economy/2019/02/14/turkeys-current-account-deficit-at-10-year-low
- Turkey’s lira hits its lowest level ever amid investor fears over sinking economy (CNBC): https://www.cnbc.com/2020/05/06/turkeys-lira-rips-toward-all-time-low-after-regulator-moves-to-stop-currency-speculation.html