Possible rate hike by Fed threatens Turkish housing sector, S&P says

ISTANBUL

An expected rate hike by the U.S. Federal Reserve Bank is creating an uncertain environment for foreign capital flows to Turkey that could ultimately hurt the housing industry, but domestic and overseas demand is rebounding, according to a Standard and Poor’s (S&P) report.

“Residential property prices in Turkey had risen strongly in 2014, gaining more than 16 percent in nominal terms. Real price gains exceeded 7 percent, up from 6 percent recorded last year,” said the report, “Housing Markets in Israel, Russia, South Africa and Turkey Show Resilience to Weaker Economic Conditions,” which was released late March 17.

“The market softened temporarily in the first half of 2014 amid slowing economic growth and interest rate hikes, but rebounded strongly as monetary conditions loosened and confidence returned,” it said.

“We expect domestic demand to rebound in 2015, supported by more accommodative monetary conditions and a boost to real incomes due to falling headline inflation on the back of lower oil prices, supporting demand for residential properties this year,” it added.

The agency forecasts a continuation of nominal and real home price appreciation in Turkey over the next two years.

“Funding conditions are likely to remain supportive for the housing market in the near term. Overseas buyers’ interest in Turkish real estate will continue to support the market, but strong structural demand from Turkey’s young and growing population will remain the key driver of housing market activity,” it added.

Economic and financial conditions in the first half of last year weighed on the Turkish housing market, the research said, pushing the average mortgage interest rate to 13.6 percent in April 2014, up from 8.3 percent at the low point in June 2013, and mortgage lending growth started to decelerate.

Home price growth slowed to 3.6 percent year-on-year in real terms by May 2014, compared to 6 percent in December 2013, the research said, pulling home sales down 10 percent in the first seven months of the year.

“The number of dwelling units authorized for construction exceeded 1 million in the year to September 2014, a 25 percent increase compared to the same period of last year. If these plans move forward, they should limit price pressures somewhat, although we still expect the market to post strong gains in nominal and real terms, of 14 percent and 7 percent, respectively,” it said.

A possible rate hike by the U.S. Federal Reserve Bank on the one hand, and quantitative easing by the European Central Bank on another, creates an uncertain environment regarding prospects for foreign capital flows to Turkey due to Turkeys’ dependence on such flows, S&P stated in the research.

According to the research, the Turkish population is expected to grow by about 11 to 12 percent between 2012 and 2023, according to the Turkish Statistical Institute (TÜİK). Istanbul’s population is projected to increase by 20 percent over this period, to 16.6 million by 2023.