Turks have not forgotten the inflation of old

We had another lottery millionaire during the holy month of Ramadan this year. The lottery is a peculiar institution: It is about guessing six randomly drawn numbers. You get the full prize if you guess all six of the numbers correctly, and it accumulates each week if nobody is able to do so. It had been accumulating for several weeks in Turkey, making the grand prize about 10 million dollars. Then, just before bayram, we had the winner. Talk shows were abuzz, talking about what one could do with that kind of money. Not surprisingly, all converged on one investment: buying homes. The question was what kind, which cities and neighborhoods, which projects? So forget about dining and traveling around, or private university for the kids. When it comes to investment, you’re talking real estate.

Turks are obsessed with buying homes. Remember the old adage: A man needs a house for this world and faith for the second one. More than 65 percent of the population is living in owner-occupied homes in Turkey. In Switzerland, that proportion is less than 40 percent. It gets higher in the United States.

But having a roof over one’s head is one thing, owning a second one as investment, is another. The what-to-do-with-lottery-money talk shows are about investing the money. That is where Turkey’s inflationary memory kicks in. It is precisely about considering the house as an asset to preserve wealth over the years. If gold is a solid investment, a house in a developing region is a perfect one.

Where does that idea come from? Turks still do have a vivid memory of high inflation. Inflation declined from 80 percent to around 8 percent about a decade ago. Unfortunately it is still around there. I should say that Turkey’s relationship to inflation is not like Germany’s. Our inflation was more recent, more moderate and more sustained. It started around the oil crisis in the 1970s and persisted for three decades. That was enough to form habits. People adjusted their lives to it by indexing to sticky prices. That is how it survived the decades despite the China effect of declining prices all around the world. I still see the remnants of those old habits in everyday life and business practice.

Only last year, publishing houses started one after the other to print book prices on their covers. The only other time I remember that happening was when I was a kid in the early 1970s. During the inflationary years, bookshops started using adhesive labels to readjust prices when need be. Only last year, around six years after the fall in inflation, some publishing houses started to print prices on the back. They were subconsciously overriding the habits built up during the inflationary years.

The habitual investment in real estate is not too different, but it has the crippling effect of keeping the domestic savings rate down. We need decades of low inflation to straighten out the habit.

That is why the recent surge in inflation is bad news.