Tuesday, December 21, 2010

Turkish Housing Bubble (Again)

The part that caught the Turkish media's attention most of the IMF's Second Post-Program Monitoring Discussions, Preliminary Conclusions for Turkey was the warnings about housing bubble, even though the Fund obviously did not use that word. Here's what they had to say:
In the context of dynamic housing construction, rapid growth of housing loans (including withdrawal of equity), and credit concentration to both developers and end-buyers for the same property pose risks if unchecked. We welcome the BRSA’s decision to establish legal ceilings on loan-to-value for residential and all other real estate loans no higher than required for securitized mortgages. In addition, raising the Resource Utilization Support Fund levy on new housing credits to the level applicable to other loans, and eliminating preferential tax treatment of real estate investment companies would help.
Nothing mysterious here, but it was enough to enrage the Association of Real Estate Investment Companies, or GYODER, who had talked very positive about the Fund's visit to them a couple of weeks ago, and for the Daily News, as well as most other Turkish papers, to run stories about the Turkish housing bubble.

Part of this is semantics, it depends on what you mean by bubble, but by going from prices, there is hardly a bubble. Rent inflation from TurksStat's official CPI figures has been tame for a long while, and Garanti house price statistics show that house prices, barring a few regional exceptions, have barely moved in the past year.
On the other hand, the Fund is also right that housing loan looks strong, despite coming from a very low base (housing loans still make up only 5% of GDP):
How come such strong housing loans have not spilled over to housing and rent prices? The answer lies in, IMHO, the real housing problem of Turkey, which I spelled out at the end of November in my HDNER column and than over at Roubini Global Economics a couple of weeks later: Despite robust demand, the even-stronger supply has kept a wedge between supply and demand. And based on the latest statistics, this wedge is unlikely to go away: On the contrary, it is likely to grow over the course of the next couple of years.

When you combine this with the fact that household leveraging is still very low in Turkey and the fact that the BRSA and the Central Bank are already taking precautions about strong housing loan growth, it is clear that we are not faced with a U.S. type housing bubble. If you'd have to pick a country, the Turkish case is more similar to Spain's boom and bust episode.

But what makes the Turkish case likely to fold into a drama as (if) it unfolds is the fact that, as the Fund notes as well, the same bank lends both to the developer and end-buyer. That's kind of like putting all your eggs in one basket....

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