Monday, September 14, 2009

Weekly Hurriyet Column: Life as a house (expert)

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. As usual, there is the cheesy movie reference, another underrated favorite of mine.

As for the column, the topic was admittedly outside my area of expertise, but given the number of questions from readers and friends on the subject, I felt I had to delve in. My friend Eren was one of the first who made me think about the topic, so I emailed him the article as soon as I had finished writing it. He thought I did a quite good job until I started talking on house prices, after which he found my style a bit wordy and my recommendation without a definite conclusion. Below is my reply to him (unfortunately in Turkish), where I discuss how I had come up with my recommendations. Anyway, Eren is right that I do not offer definite conclusions on house prices, and for good reason, as I explain below. But if my good old friend Cagatay, who is a competent real estate development manager and equally incompetent skier and sailor, gets down to work, as he promised to, I'll have something more to say soon, as we are planning on doing some research with the Garanti data.
Neyse yazdiklarina da hak veriyorum; bence de ilk yarida iyi bildigim seyleri guzel yazdim da is hem iyi bilmedigim hem de cok iyi data olmayan seylere gelince cuvalladim galiba.....Bir de tabii biraz daha vakit olsa o Garanti verisinden daha somut seyler cikabilirdi; simdi real estateci bir arkadasla onun uzrerinde biraz calismayi planliyoruz, bakalim ne cikacak.

Wordy oldugu konusunda da hak veriyorum. Bazen (mesela gecen ve evelsi hafta) cok quantitative yapiyorum da bu sefer 2 saatlik bir analizin uzerine ev fiyatlari su tarihe kadar % su kadar inecek diye cok somut ve yaniltici birsey demek istemedim. Cagatay'la calismamizdan o tip bir sonuc (her ne kadar accurate olmasa da) cikar ama onun icin en az 10 saat filan datayla ugrasmam lazim. Bu arada gercekten big picture heryerde ayni, 2007 sonrasinda fiyatlar 2008 basi peak etmis ama veri dogruysa inanilmaz semtler arasi farkliliklar var, hem de yakin yerlerde bile.... Cok sasirtici....

Sonuc olarak bence asil refinance edelim mi etmeyelim mi sorusuna net bir cevap verdim de ev alalim mi almayalim mi konusunda cok acik ve net konusmadim. Ama aslinda onun da mantigi refinace ile ayni; biraz bekle ama cok bekleme. Ama iste faizlerden fiyata etki ne kadar lag ile gelir ve de ekonomide zayiflik ev fiyatlarini dusurur mu, bu iki opposing effect nasil play out eder analizsiz kestirmedigim icin orada refinancingde oldugu kadar kesin konusamadim. Ama su gercek ki benim senaryomda en safe bet house investment; ona da elimination usulu ulastim; simdi faizler artacaksa bonda girmek zaten delilik; buyume stock positive ama cok yavas olacak ve de stock da da kurda da cok volatilite gelecek. Geriye de altin ve gayrimenkul kaldi yani.
Anyway, I've already chatted too much; here's the column:

I tend to rise to the bait when I get too many questions on a specific topic, with the latest example being housing prospects.

Of course, the main driver of the interest is the recent fall in home credit rates, and as most of the inquirers are thinking about refinancing their loans rather than buying a house, they are wondering if rates have further downside scope. To answer this question, we need to start with where it all began, the banks’ bank.

I have been arguing for a long time that the Central Bank’s (CBT) extensive monetary easing would not lead to an as large fall in market rates, and it hasn’t. One big exception has been the bond market, where knowing a continual easing is on the way, banks have pursued a gold rush into bonds, pushing yields into single-digit territory. Perversely, this mechanism has clogged the market for rates that really matter, i.e. loan rates, albeit to a lesser degree than commonly thought, as there is not much demand for credit.

The recent thawing in housing credit is due to this process ending rather than the monetary transmission mechanism’s wheels finally starting to turn. The CBT is likely to end its easing cycle towards the end of the year, and banks, knowing this, have started looking into alternatives. With the lowest potential for NPLs, housing credit is a sure bet.

It is then the very same mechanism holding back lending that has given the recent boost to housing credit. Seen in this way, it becomes clear that home loan rates have limited further room to go down until the end of the year, with the global environment, Central Bank policy and Treasury borrowing schedule, with light redemptions, all supportive. But I would not wait much longer: With the Treasury entering dangerous waters, as I outlined last week, and the economy picking up, the upwards potential for rates is high in 2010.

A simple question such as “is this a good time to buy a home?” is even more deviously complex. A coarse comparison with other countries reveals that Turkish median house price to disposable income ratio, at around six, is higher than many, but given Turkey’s demographics and the small detail that the comparison group is yet to emerge from a major housing slump, such benchmarking does not make much sense. Historical comparisons are difficult as well due to lack of data.

Using Garanti Mortgage’s price data from 2007 for the largest six cities reveals that house prices look quite reasonable compared to peaks of early last year, when looked at as simple time series or price-rental ratios. However, given that house prices are quite sticky and usually lag behind other asset prices or even economic data, there might be further downward potential. On the other hand, the key is again not to wait too long, as the lower rates will start biting into prices through pent-up demand sooner rather than later.

Complicating this analysis is lack of data on quantities, without which it is impossible to discern demand and supply affects. But available data does not point to any sudden shifts in either in the near term. Another issue is the remarkable intra-city differences, some of which hint at attractive regional opportunities.

Looking at the big picture, a house also seems like a good investment- if you share the rather gloomy economic outlook I have been outlining for the past few weeks. With the economy to recover slowly, debt worries on the way and inflation and rates poised upwards, albeit not significantly, gold and real estate look like safe bets with decent returns for a risk-averse investor with a medium-term outlook.

For gold, you also need to have a position on the global economy. If you can’t handle that, all you have is bricks.

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