Mortgaging the Future

News that a new mortgage law may be on the way to the statute books was widely welcomed this week, as property analysts and macroeconomists alike forecast a highly positive future, if and when the reform comes into place. With few Turks taking an institutional route to home ownership, the arrival of proper mortgages could galvanise the real estate market and bring much needed new capital into the economy as a whole.



After three years of stagnation, Turkey's real estate market heated up in the second half of 2004, fuelled by widespread hopes about the country's eventual accession to the European Union. The decline of the dollar towards year-end was also healthy for the market, where prices are mainly in US dollars, although most buyers have either euros or Turkish lira to spend.



At the end of 2004, apartments in reputable compounds in Istanbul were selling within three or four weeks of going on the market, at prices 25% higher than the previous year. Apartments in the Arkent compound in Istanbul's prestigious Etiler district, for example, were reportedly sold at $400,000 for 165 sq metres, compared to $360,000 in late 2003.



Yet the new mortgage law is aimed at bringing into the market the vast bulk of the Turkish population, whose low-to-middle incomes have so far precluded them from much of a role in real estate. Only some 3% of all house purchases in Turkey are currently via institutional financing. Most Turks instead either rent, inherit or employ a system of loans and deals within their extended families to secure their dream home.



Banks generally lack the long-term funds to offer loans over an extended period. Unable to securitise such transactions, the current maximum term for a loan is five years, with this carrying a punishing interest rate of 2% per month. As a result, housing is seldom used as capital.



A system of housing credits is, however, currently in place, but it concentrates mainly on large-scale development projects, with rates of interest that exclude all but the most well-financed.



There also exists no standardised system of property evaluation. At the same time, the insurance market is very undeveloped as far as housing is concerned. While earthquake insurance is compulsory in at-risk areas, life insurance is still the preserve of the country's elite, while other forms of housing and loan insurance are scarcely available.



As such then, even if a new mortgage law could be introduced, a number of other things have to happen before the market can reach its full potential. Most real-estate analysts therefore see the government's expressed target of a first-half 2005 implementation date for the new law as optimistic. Instead, early 2006 and even 2007 are the dates most analysts are looking at.



Nonetheless, there is major enthusiasm for the new regulation. The new law envisages a system based on US standards, with mortgage financing institutions established that will supply resources to institutions that provide housing credits and take on transfers of credit, the formation of credit funds, risk management and standardisation. At the same time, there will be a Credit Financing Fund, which will use international methods to set mortgage rates. The idea is that these should be brought into line with rents, which tend to increase in line with inflation, rather than market interest rates.



The net result of a working mortgage system is also likely to be an increase in demand for housing and thus an increase in house prices - though clearly this will depend on how responsive supply becomes. Many point to the size and experience of the Turkish construction sector as indicating that while there might be temporary supply glitches, most likely in the longer term, construction will be able to keep well up with any increasing demand.



Yet demand for older and more prestigious property, which cannot be met by new build, may see prices for this kind of property jump still further. That is good news, perhaps, for those already owning older property, who will likely see a stronger return on their investment. This may also be particularly relevant to many foreigners, who have recently been buying more property in Turkey, particularly summer residences on the Aegean and Mediterranean coasts.



On this score, Tevfik Turel, the Turkey and Romania director of real estate brokers Stewart International Turkey, recently claimed that the country was taking serious steps to become the "Florida of Europe". According to him, the coastline between Alanya and Kusadasi was the most popular area.



Less easy to evaluate - yet likely to be far more impressive - will be the effect on the economy of many Turks using their existing property to back up investments in commercial activity. Such a release of credit could be a potentially massive step in the country's development.