Monday, November 29, 2010

Weekly Hurriyet Column: Desperate house-economist seeking help

Below is the unedited version of my column for this week. You can read the final version at the Daily News website, but since I have been editing my columns myself on the Daily News media webeditor since March, you won't see much of a difference between the two. As for the title, this is the first time I am paying homage to a movie/ TV show I have never watched before. But I am sure all my chick friends immediately recognized the reference right away, as it is one of the most popular chick flicks (or rather TV shows) of the last few years. I wonder when they'll turn that one into a movie as well...

Before I jump into more serious matters, I have a request from IMSAD, or other industry associations, for that matter: To tell you the truth, I was really excited when I first received the press bulletin for the report, as I was hoping they would provide us with proprietary data on their members’ production. Since they are, after all, input-providers to the construction sector, such data would have made the perfect leading indicators of construction activity. But alas, no suck luck... Incidentally, coming up with such proprietary indices was one of my pet projects for the Daily News, and labor force, construction and autos were the top of my lists. I first started with labor force data, as there is a Dogan (Daily News' parent company) employment firm that naturally has timely labor supply and demand data. But they were not interested, and I lost interest in the project:(

As for the usual addenda, first, note that you can not immediately conclude that there is an increase in housing loan demand from the fact that housing loans are increasing. Like any other good, there is a supply side as well as a demand side and what you are observing (quantity of loans and price) is the interaction of both. Loyal readers would know that I have a method of separating supply and demand, which I have used in my columns a few times before. However, a simpler method would be just writing out credit demand and supply equations and estimating them simultaneously. I recently came across an IMF paper that does exactly that for Jordan, so if you've got some time, an econometrics software installed in your laptop and at least some vague memories of an undergrad. metrics courses, feel free to go ahead and replicate their results for Turkey. Or if you don't have the time, the software or the memories:), just have a look at the TurkStat subindex for consumer confidence, probability of buying a house in the next 12 months:
By the way, I did not ask whether they were inspired by my column, but soon after I wrote it, the Daily News ran an article about a well-known photography retailer entering the real estate sector. "bubble, buuuubbbleeee, buuuuuuubbbbbbleeeeee!!!!" was the response of my ex-trader friend, I mention in the column who happens to be, other than being an fener5ce fan (after watching Barcelona on Monday, I am confident, i.e. wishing:), we will give the eziks the high-five in Inonu at the earliest opportunity, kind of moonlighting in the real estate sector as well.

I guess he may be right: After all, you know what they say about the 1929 crash: If shoe-shiners are giving you stock tips, it is time to get out of the stock market. So I leave you with a simple question: If photographers are starting to build buildings rather than photograph them, is it time to leave the real estate sector? Real estate bubbles build and burst more slowly than the stock market, but you get the idea...

Anyway, this is enough "rambling" for one week, on to the column:

I am prone to getting confused quicker than you can say Confucius, so it is no wonder that two recent, and seemingly conflicting, data on housing managed to profoundly baffle your friendly neighborhood economist, who had become a self-proclaimed house expert some time ago.

First, the Turkish Statistical Institute, or TurkStat, released third quarter house sales statistics on Thursday. Home sales fell 7.3 and 25.2 percent compared to the previous quarter and same quarter of last year. While there are important regional differences, sales in Istanbul plummeted 24 percent.

Before the ink had dried on the TurkStat figures, the Association of Turkish Building Material Producers, or İMSAD, painted a completely different picture the next day. In its inaugural report on the construction sector, İMSAD boldly claimed that housing loans were undergoing a boom similar to 2004. How could falling home sales and a housing credit boom be consistent?

While İMSAD is right that housing loans have been robust since early 2009, their rate of growth is nowhere near the 2004 episode. The weekly change in housing loans, after hitting rock bottom in early 2009, has recovered in the next few months and has been hovering around 0.6 percent for over a year.
In any case, decreasing home sales and robust credit growth would be consistent only if the amount of credit in each transaction increased. This could happen if the average value of a house sold were increasing, or if people started to use more and more credit to buy homes. We’ll never know for sure because such data, while readily available and closely followed in the U.S., do not exist in Turkey.

However, an ex-trader friend was noting that people might have started to see homes more like an investment: As the stock market seems to be saturated and Treasury bills are already at record-lows, it could make sense to invest in the most expensive house you can afford by borrowing as much as you can at low interest rates.

The problem is that for the past year, the rise in house prices has consistently been below inflation, according to an index created for Garanti Bank. But that doesn’t mean it will always be that way. To make an educated guess on where prices are headed, it is best to look at the forces of supply and demand.

While the low-interest rate environment could keep demand flowing for a while, the supply picture is a cause for concern. İMSAD takes the manufacture of other non-metallic products in industrial production data as a proxy for production of construction materials. Using that and other publicly-available leading indicators, it concludes that construction activity remains strong.
I have followed an alternate route by looking at construction and occupancy permits, as I have found permits to be a good leading indicator of construction activity. Third quarter data will be released Dec. 7, but municipalities have granted nearly 53,000 construction permits in the first half of the year. While that means a robust 8.4 percent yearly increase, it translates to 322,000 apartments, or a yearly 29.1 percent rise.

Using the same figures, it is possible to tie at least part of the dismal third quarter home sales to supply. After all, occupancy permits, which builders apply for at the building’s completion, had fallen 32.2 percent yearly during the first half of the year. That supply shock, in turn, can be traced to the low construction permit numbers in 2008 and 2009.
It seems that the construction sector is hoping that if they build it, the customers will come. If that doesn’t happen, we are likely to see a downward pressure on home prices as all those apartments start hitting the market.

Emre Deliveli is a freelance consultant and columnist for Hurriyet Daily News & Economic Review and Forbes as well as a contributor to Roubini Global Economics. Read his economics blog at

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