Turkey’s surging house prices unsustainable, but market dynamics to help prevent a slump: Moody’s

The young population’s solid housing demand, disposable income, economic growth combined with prudent lending practices and refined legislation underpin collateral strength in the sector, Moody’s said.

However, the asset class is also subject to risks that are both unique to an emerging market and that apply to all covered bonds, the ratings agency said, suggesting this would be unsustainable.

Turkish covered bond legislation preserves cover pool credit quality and is aligned with laws in developed markets. 

Moody’s said strong lending practices, favorable demographics and the low weight of mortgages in Turkey’s financial system lessen the risk of a housing-related slump in Turkey like those seen in the U.S. or Spain.

Also, mortgage-covered bonds are among the safest credit instruments in the country while mortgage loans are some of Turkish banks’ most creditworthy assets, it added.

“The rate of house price growth in Turkey is not likely to be sustainable for much longer, but when it does stabilize or turn negative, the market will likely have a soft landing owing to robust lending practices and macro-prudential measures that aim to insulate mortgage lending from a downturn,” said José de León, a Senior Vice President at Moody’s. 

“The low weight of mortgage lending in the financial system, at about 6 percent of banks’ total balance sheets, reduces the likelihood that a housing correction would spill into the financial system,” says Tomás Rogriguez-Vigil, an Analyst at Moody’s. 

Moody’s research says that the main risks for investors in Turkish mortgage covered bonds stem from tail-events related to (1) Turkey’s position as an emerging market; (2) a challenging environment for the country’s banks over the next 12 to 18 months; (3) earthquakes; and (4) refinancing needs. 

To attract both typical emerging markets investors, as well as traditional covered bond investors in search of higher yields, Turkish mortgage programs aim to mainly issue in foreign currencies, namely euros and U.S. dollars.