Turkey Finance: Teething Troubles For The Mortgage Market

Hailed as a way of extending property ownership among Turkey's low paid workforce, the new mortgage law has run into problems even before the first deal has been struck

A combination of high interest rates and political and economic uncertainty mean that the long term variable interest mortgages available for the first time, will be out of reach to the very people they are supposed to benefit. Worse still, as buy-to-let increasingly becomes a safe investment option for Turkey's rich middle classes some analysts fear the introduction of mortgages could benefit those who already own property at the expense of non-home owners.

Best laid plans

On paper Turkey's new mortgage law does seem like both an inevitable result of a new low-inflation economy and at the same time a long awaited panacea for the problem of extending home ownership to the poorest quartile of Turkey's urban population who live in rented accommodation.

As ever in Turkey, things are not quite that simple. Sure enough new legislation allowing the introduction of securitised variable rate long-term mortgages has been passed through parliament and the passage of further legislation allowing for a secondary market is expected to be passed before this year's general election, which together should allow for the issuing of the first mortgage-backed securities and the first mortgages to be issued early in 2008.

With home loans still a rarity in Turkey and demand for new homes only set to increase with the aging of the currently young demographic profile and the continuing trend to urbanisation, no one argues that the new mortgage law is anything but needed. However, while as recently as two years ago analysts were gung-ho about the possible effects of the new law, few now expect it to have anything like a major short-term effect.

To begin with they point out that both demand for housing and house prices have been dropping since mid last year when the government jacked up interest rates to 17.5% to halt a run on the Turkish lira, and attack inflation which had begun rising again.

Pre-crisis monthly interest rates of 1% and the promise that the introduction of mortgages would spark a price boom persuaded many to fund property purchases on standard bank loans, pushing property prices to an historic high. However post-crisis rates of 1.5% per month have forced a drop in property prices of an average 10-15% in Turkey's main urban centres, fuelling suspicion that the market may have peaked and that any "mortgage law" effect has already been and gone.

Now with no indication when, if at all, the government can rein in inflation and bring down interest rates, and with it already having axed plans to offer tax incentives to mortgage holders, analysts point out that the potential market for the new financial products is appearing increasingly limited. They point out that the majority of the estimated 16m people living in rented accommodation simply don't earn sufficiently high salaries to be able to service a variable rate mortgage, and that without any form of tax incentives there is very little difference for the customer between the new mortgages and existing bank loans, which under existing legislation can be extended for as long as ten years. Indeed, some contend that given ongoing political and economic uncertainties low earners may actually prefer the existing short term loans, supplementing them with informal credit arrangements within extended family groups--the traditional system of financing house purchases for the bulk of the Turkish population.

Buy-to-let

At the same time, analysts point out that new housing projects in Turkey's major urban centres where the majority of demand for new housing is being experienced are aimed at the upper income groups, with the majority of purchases over the past few years believed to be being made as investments, either for re-sale as prices increase or as buy-to-let. Where, they ask, are the housing schemes aimed at first-time buyers and low income groups, who had been expected to make up the bulk of those taking advantage of the new mortgage law?

With the continuing effects of high interest rates and low public confidence expected to depress demand for new mortgages from the low income groups the new products had been designed to serve, the main group that will be able to fund new purchases will be those with a higher disposable income who already own property and who are less susceptible to economic instability--in other words buy-to-let investors.

The introduction of mortgages might even fuel a new price boom, as existing property owners compete to take advantage of the new mortgage products to build up their own property portfolios, further pushing up prices out of the reach of the low income groups. It is a scenario that the current government has to date preferred to ignore, but which, assuming it is returned with a working majority following general elections later this year, it may yet be forced to address.