Turkey: a crisis and maybe an opportunity
Lalaine C. Delmendo | May 18, 2021
Turkey’s nationwide house prices soared by 30.6% during the year to Q1 2021, to an average of TRY 4,054 (US$502) per square metre (sq. m.), according to the Central Bank of the Republic of Turkey (CBRT), following y-o-y rises of 32.6% in Q4 2020, 28.1% in Q3, 23.7% in Q2, and 15.1% in Q1.
However in real terms house price growth is far more modest, at 13% during the year to Q1 2021, due to persistently high inflation. Yet this remains one of the strongest y-o-y episodes of real house price growth over the past decade.
On a quarterly basis, nationwide house prices increased 4.3% in Q1 2021 but were actually unchanged when adjusted for inflation.
In Turkey’s major cities:
- In Istanbul, Turkey’s largest city and most expensive housing market, the average house price rose by 20.8% during the year to Q1 2021 to TRY 6,312 (US$782) per sq. m. Adjusted for inflation, house prices were up a modest 4.5% y-o-y.
- In Ankara, the country’s capital, house prices rose by 28.3% y-o-y in Q1 2021 (11% inflation-adjusted) to an average of TRY 2,972 (US$368) per sq. m.
- In Izmir, the country’s third largest city, house prices went up by almost 40% y-o-y in Q1 2021 (21% inflation-adjusted) to TRY4,911 (US$608) per sq. m.
Turkey’s housing market was mainly buoyed by local demand. Foreign investment fell last year due to coronavirus-related restrictive measures.
During 2020, the total number of home sales in Turkey rose by 11.2% to almost 1.5 million units, in contrast to y-o-y declines of 1.9% in 2019 and 2.4% in 2018, according to Turkish Statistical Institute (TurkStat). Home sales increased 11.5% in Istanbul and surged by 18.6% in Ankara.
Foreign home purchases fell by 10.2% y-o-y to 41,298 units in 2020 due to coronavirus restrictions, according to TurkStat figures, having risen more than 38% annually during the years 2017-19.
In what is likely further to encourage foreign purchases, in March 2021 the Turkish lira lost almost 8% of its value against the US dollar from just a month earlier, to TRY 7.68 per USD 1, after Erdogan unexpectedly sacked central bank governor Naci Agbal, on top of a 50% currency devaluation over the past three years. For foreigners, the currency’s devaluation means that the property market is very attractively priced, luring many buyers from the Gulf.
“Property values are low in dollar terms,” said Priti Pandey of the School of Real Estate, RICS School of Built Environment, Amity University in Mumbai. “The Turkish government’s decision to postpone the imposition of the luxury housing tax for one year, to 2021, impacted house demand positively, although the Covid situation did set a cautious approach to investment.”
However Turkey’s housing market growth is expected to moderate this year, as interest rates remain stubbornly high, and with the luxury housing tax now in force.
Turkey’s economy grew by 1.8% during 2020, emerging as one of only few countries globally to avoid a contraction due to the COVID-19 pandemic. The growth was mainly driven by a burst of credit in mid-2020, with state banks lending almost doubled in 2020 from a year earlier.
Luxury housing tax came into effect
The luxury housing tax and other tax measures entered into force in January 2021. It is imposed on residences with a value of over TRY 5 million (US$619,000). The following table shows the revised tax rates:
|HOME VALUE||TAX RATE|
|Below TRY 5 million (US$619,000)||Exempt|
|TRY 5 million to TRY 7.5 million (US$619,000 to US$929,000)||0.3% of the amount exceeding TRY 5 million|
|TRY 7.5 million to TRY 10 million (US$929,000 to US$1.24 million)||TRY 7,500 + 0.6% of the amount exceeding TRY 7.5 million|
|Over TRY 10 million (Over US$1.24 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 residence will not be subject to the luxury housing tax on whichever residence has the lowest value.
After a burst in 2020, demand is now falling
During 2020, the total number of home sales in Turkey rose by 11.2% to almost 1.5 million units, in contrast to y-o-y declines of 1.9% in 2019 and 2.4% in 2018, according to Turkish Statistical Institute (TurkStat).
In Turkey’s major cities:
- In Istanbul, which has an 18% share of transactions, home sales rose by 11.5% y-o-y to 265,098 units.
- In Ankara, which accounted for a market share of 10%, the number of home sales surged 18.6% y-o-y to 157,095 units.
- In Izmir, which represented 6% of the market, home sales soared 18% y-o-y to 93,457 units.
- In Bursa, which took 3.7% of the market, home sales increased 10.6% y-o-y to 55,222 units.
- In Antalya, which captured 4.3% share, the number of home sales fell by 2.1% y-o-y to 63,898 units.
However in Q1 2021, home sales transactions in Turkey fell to 263,050 units – down by 22% from the previous quarter and by 23% from a year earlier, as interest rates rose sharply and as the luxury housing tax law came into force.
Foreign homebuyers falling amidst pandemic
Before the pandemic foreign buyers had been buying large amounts of Turkish property, mirroring a substantial increase in Gulf tourism. As the Lira has fallen visitors have been attracted to Turkey. 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.
Between 2017 and 2019, foreign home purchases more than doubled to almost 46,000 units, according to Turkish Statistical Institute (TurkStat). Iranians and Iraqis accounted for almost one-third of the total foreign purchases during the period.
“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 about 46% of total annual sales, followed by Antalya (20%), Ankara (6%) and Bursa (5%).
However last year tourism and travel all over the world ground to a halt, causing foreign home purchases to fall 10.2%, and the weakness of foreign demand continued this year. Foreign home purchases in Turkey fell by another 9.7% y-o-y to 9,992 units in Q1 2021.
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 finally 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 homebuyers:
- 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. Homebuyers must also hold the property for 12 months after purchase.
- Stamp duty for “promise to sell agreements” reduced to 0%, from 0.95%.
However in 2020, there were talks that the government is planning to raise the real estate investment requirement to US$500,000, amidst some public pressure.
Istanbul’s rental yields are not attractive
Turkey’s rental yields are not that attractive. Gross rental yields in Istanbul range from 1.81% to 4.71%, according to 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 surging
Turkey’s residential mortgage market is expanding strongly, buoyed by the government’s monetary expansion policies last year – used as a quick fix to avoid a coronavirus-induced economic recession. In April 2021, outstanding housing loans rose by almost 30% to TRY 252.34 billion (US$31.41 billion) from a year earlier, following a 36.4% growth in 2020, according to the Central Bank of the Republic of Turkey (CBRT).
Over the past twelve years, housing loans in Turkey have increased from about TRY 12.4 billion (US$ 1.54 billion) in 2005 to TRY 253 billion (US$ 31.3 billion) in 2020, or by an average of 23.5% annually from 2006 to 2017. The mortgage market amounted to 5% of GDP in 2020.
Turkey’s currency and debt crisis
The global crisis of 2008 caused house prices in Turkey to fall 14.65% (after inflation), then by 2.82% in 2009, by 3.54% in 2010, and by 2.39% in 2011. The market then surged between 2012 and 2016, largely due to the rising middle class gaining access to mortgage finance for the first time.
House price rises started to slow after 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 27.82%.
After falling to a record-low of 9.11% in July 2020 as the government facilitated access to credit to stimulate the economy, housing loan interest rates have risen sharply again, reaching 17.74% in March 2021, following several rate hikes by the central bank to rein in inflationary pressures.
Rising inflation has 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 faced charges in relation to the failed coup attempt in 2016. Brunson was released after two years of detention. 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 Turkish Lira plunged to TRY 6.3 per USD 1 in September 2018, from TRY 3.48 per USD 1 the previous year – an almost 45% drop. The lira has remained weak since.
Turkey has now 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 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, last year the current account balance returned to deficit, as the COVID-19 pandemic hit. During 2020, Turkey run a current account shortfall of US$36.7 billion.
In March 2021, the Turkish lira lost another 8% of its value from just a month earlier, to TRY 7.68 per USD 1, after Erdogan unexpectedly sacked central bank governor Naci Agbal. During his less than five months in office, Agbal raised the country’s key interest rate by roughly 450 basis points to 19%, a move that most economists believe was necessary to tame the country’s high inflation and to stabilize the Turkish lira. The surprise removal of Agbal shocked both local and foreign investors, who had praised the central bank’s recent monetary policy.
In April 15, 2021, Turkey’s newly appointed central bank governor Sahap Kavcioglu held the key rate unchanged at 19% but removed a pledge to deliver additional tightening, prompting speculation that rate cuts might be imminent.
Turkish economy avoids COVID contraction
Turkey’s economy grew by 1.8% during 2020, emerging as one of only few countries globally to avoid a contraction due to the COVID-19 pandemic.
The growth was mainly driven by a burst of credit in mid-2020. To avoid a coronavirus-induced economic recession, the government loosened monetary policy and introduced a stimulus package equivalent to 13% of GDP, mostly delivered through the banking sector in the form of partial credit guarantees and loan deferrals. As a result state bank lending almost doubled in 2020. Other fiscal programs included social support payments to households, tax deferrals, assistance to furloughed workers, and support for businesses.
The result was that during 2020:
- Turkey’s economy grew by 1.8%
- Financial sector activity surged by more than 21%
- Tourism and other services fell by 4.3%
- The construction sector, an engine of growth in recent years, fell by 3.5%
In March 2021, annual inflation surged to 16.19%, the highest level since July 2019, according to TurkStat. Inflation was 12.3% last year, after 15.2% in 2019 and 16.3% in 2018, according to the IMF.
Unemployment rose to 13.4% in February 2021, up from 12.7% a year earlier, according to TurkStat. Unemployment averaged 10.7% from 2010 to 2020.
- 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
- Turkey At a Glance (International Monetary Fund): https://www.imf.org/en/Countries/TUR
- Consumer Price Index (2003=100) (Central Bank of the Republic of Turkey): https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Statistics/Inflation+Data
- House Sales Statistics, March 2021 (Turkish Statistical Institute): https://data.tuik.gov.tr/Bulten/Index?p=House-Sales-Statistics-March-2021-37467&dil=2
- 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
- Turkey offers citizenship to foreign property buyers (Al Jazeera): https://www.aljazeera.com/economy/2017/1/13/turkey-offers-citizenship-to-foreign-property-buyers
- New Turkish citizenship rules to encourage investment (Daily Sabah): https://www.dailysabah.com/business/2018/09/19/new-turkish-citizenship-rules-to-encourage-investment
- The measures transforming Turkey’s property market (Property Turkey): https://www.propertyturkey.com/news/the-measures-transforming-turkeys-property-market
- Housing Sizzles On The Bosporus (Global Finance): https://www.gfmag.com/magazine/april-2021/housing-sizzles-bosporus#:~:text=%E2%80%9CThe%20Turkish%20government´s%20decision%20to,2021%2C%20fueled%20by%20growth%20expectations.
- Turkey amends Luxury Housing Tax provisions (EY): https://taxnews.ey.com/news/2020-0423-turkey-amends-luxury-housing-tax-provisions
- 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
- Turkey’s economy grew by 1.8% in 2020, avoiding COVID contraction (Al Jazeera): https://www.aljazeera.com/economy/2021/3/1/turkeys-economy-grew-by-1-8-in-2020-avoids-covid-contraction
- Moody’s upgrades Turkey´s economic growth forecast (TRT World): https://www.trtworld.com/business/moody-s-upgrades-turkey-s-economic-growth-forecast-44492
- Turkey´s 2020 current account deficit at $36.7B: CBank (Anadolu Agency): https://www.aa.com.tr/en/economy/turkeys-2020-current-account-deficit-at-367b-cbank/2142391#:~:text=Amid%20pressure%20from%20the%20coronavirus,with%20revisions%2C%20the%20bank%20said.
- Turkish lira falls 15% after bank governor sacked (BBC News): https://www.bbc.com/news/business-56479702
- ‘People are just shocked’: Turkey’s lira plunges after Erdogan sacks third central bank chief in two years (CNBC): https://www.cnbc.com/2021/03/22/turkeys-lira-plunges-after-erdogan-sacks-central-bank-chief.html
- Consumer Price Index, March 2021 (Turkish Statistical Institute): https://data.tuik.gov.tr/Bulten/Index?p=Consumer-Price-Index-March-2021-37381&dil=2
- Labour Force Statistics, February 2021 (Turkish Statistical Institute): https://data.tuik.gov.tr/Bulten/Index?p=Labour-Force-Statistics-February-2021-37487&dil=2
- Turkey: Central bank holds rates in first meeting with new chief (Al Jazeera): https://www.aljazeera.com/economy/2021/4/15/turkey-central-bank-holds-rates-in-first-meeting-with-new-chie
- Turkey’s new central bank chief holds interest rates, sparking concern among investors (CNBC): https://www.cnbc.com/2021/04/15/turkeys-central-bank-holds-interest-rates-sparking-investor-concern.html