RESEARCH BRIEF TURKISH HOUSING MARKET: PRICE BUBBLE SEPTEMBER 2014 SUMMARY OVERVIEW Debates on the existence of a price bubble in the Turkish housing market have continued after numerous news releases in both international and national press in recent months. In order to contribute an analytic perspective to these debates Cushman & Wakefield has analysed various key factors in the Turkish housing market in detail. For this purpose, price-to-rent and price-to-income ratios, which are accepted internationally as the leading indicators in detecting housing price bubbles, were examined. In addition, housing price growth and housing sales volumes were put in relation with certain macroeconomic indicators (construction cost, interest rate and inflation). After having analysed the housing price and rental growth indexes were between 2010 and 2014H1, it is possible to divide the period into the pre-2012 period, recovery after the 2008 global financial crisis, and the post-2012 period, fast growth period. If inflation-adjusted figures are analysed, the housing price growth was below inflation in the pre-2012 period, while an increase was observed after 2012 with a lagged effect. On the other hand, the housing price growth depreciated against inflation in the first half of 2014, due to a recent hike in inflation rates. Price-to-rent and price-to-income ratios displayed constant growth and no significant change was observed to be able to refer to a price bubble in the Turkish housing market. New legal regulations had an effect on the housing market, while particularly the VAT increase and the new Urban Regeneration Law continue to have an impact on housing prices and sales volumes. is delighted to provide in-depth research on the Turkish housing market. Turkey River Plaza Büyükdere Cd. Bahar Sk. No:13 Kat:15 Levent 34394 Istanbul www.cushmanwakefield.com/knowledge This report has been produced by LLP for use by those with an interest in commercial property solely for information purposes. It is not intended to be a complete description of the markets or developments to which it refers. The report uses information obtained from public sources which LLP believe to be reliable, but we have not verified such information and cannot guarantee that it is accurate and complete. No warranty or representation, express or implied, is made as to the accuracy or completeness of any of the information contained herein and LLP shall not be liable to any reader of this report or any third party in any way whatsoever. All expressions of opinion are subject to change. Our prior written consent is required before this report can be reproduced in whole or in part. Should you not wish to receive information from LLP or any related company, please email unsubscribe@eur.cushwake.com with your details in the body of your email as they appear on this communication and head it Unsubscribe. 2014 LLP. All rights reserved. 1
HOUSING PRICE BUBBLE INDICATORS Due to its longevity a housing price bubble can at times be seen as a bigger threat to the economy than a stock market bubble. A housing price bubble occurs when the housing price increase is higher than the rise in rents. The leading measures to identify a potential housing price bubble are price-to-rent and price-toincome ratios. Based on these indicators, the relationship between price and rent in the Turkish housing market were examined in comparison with certain macroeconomic indicators. Based the results of this analysis, it is possible to speak about two different periods between 2010 and 2014H1, the recovery period after the 2008 global financial crisis (pre-2012) and the fast growth period (post-2012). HOUSING PRICE AND RENTAL GROWTH 2 2010 2011 2012 2013 2014H1 2nd Hand Price Growth Rental Growth NOMINAL GROWTH RATE 2ND HAND HOUSING NEW HOUSING RENTAL GROWTH 2010-11 10.6% 15.7% 8.8% 2012-13 33.3% 24.7% 25.1% 2014 H1 7.7% 3.1% 7. REAL GROWTH RATE (INFLATION-ADJUSTED) 2ND HAND HOUSING NEW HOUSING RENTAL GROWTH 2010-11 -7.4% -2.3% -9.2% 2012-13 19.3% 10.7% 11.1% 2014 H1-1. -6. -2.2% Inflation Based on our analysis, key findings are summarized below: Second hand housing and new housing price growth rates and the rental growth rate displayed a similar pattern in general. The relatively lower growth rate in the pre-2012 period may be associated with a slow recovery of housing prices after the global financial crisis in 2008. As a matter of fact, both housing prices and rentals have accelerated after 2012 with a lagged effect. If inflation-adjusted growth rates are analysed, the housing price growth rate was below inflation, with an increasing trend after 2012. During the first half of 2014, both housing price and rental growth rates were below inflation which started to rise since the last quarter of 2013. HOUSING PRICE AND RENTAL GROWTH (INFLATION ADJUSTED) - MAY 2014-2nd Hand Price Growth Rental Growth Comparing second hand and new housing prices, it is observed that the increase in new housing prices was higher in the pre- 2012 period, while the increase in second hand housing prices was higher in the post-2012 period. Few reasons can explain this. The recently enacted Urban Regeneration Law, which became effective in May 2012, is likely to have had an impact in housing prices due to increased expectations in value creation. Furthermore, new housing schemes are mostly developed in peripheral areas due to land shortage in central locations, where current stock is relatively older but priced at a significantly higher level. Higher land costs and the value increase in central locations both affect new and second hand housing prices. Based on the price-to-rent ratio, the most important housing price bubble indicator, growth in second hand housing prices and rentals displayed a similar pattern and no significant difference was observed in order to be able to identify housing price bubble. 2
PRICE-TO-RENT AND PRICE-TO-INCOME RATIOS As mentioned above, housing sale prices and rentals are compared (2010=) in the first stage. Since new housing projects have not been added to the housing stock for rentals yet, second hand housing prices are used for this purpose. Second hand housing sale prices increased by 58., whereby rentals increased by 45.9% between 2010 and 2014H1. Both displayed similar patterns until the beginning of 2013. Subsequently, housing prices displayed a higher growth rate than rentals. This can be explained with an increasing demand for second hand housing due to the mentioned recent legal regulations. This also confirms that that individual investors still prefer to invest in the housing sector due to expectations of capital value gains rather than sustainable rental revenues. PRICE/RENT GROWTH 180 2010= 160 120 2nd Hand Price Index Rental Index Inflation Data for price-to-income is not available in Turkey. Therefore, an income index based on GDP per capita (2010=) is used to compare with the housing sale price index for the 2010 2013 period. It is observed that income per capita displayed a constant growth, while higher growth in second hand housing sale prices was observed especially after 2012. PRICE/INCOME GROWTH 150 2010= If price-to-rent and price-to-income ratios are examined after 2010, no significant change was observed to detect a potential price bubble. The average return period for a housing investment is approximately 16-17 years, while the average value of a house equals to the sum of the average annual income of 6.5-7 years. PRICE-TO-RENT AND PRICE-TO-INCOME RATIO 20 18 16 14 12 10 8 6 4 2 SOURCE: The data is compiled from REIDIN and TURKSTAT. The relationship between certain macro indicators and housing prices and housing sales are examined to understand dynamics of the housing market. HOUSING PRICE/HOUSING SALES VOLUME The housing sales volume displayed periodical volatility, while housing prices exhibited constant growth. The significant increase in the housing sales volume in 2013 can be explained by a drive to purchase before VAT was increased in the beginning of 2014. Furthermore, a decrease in the housing loan interest rate in the beginning of 2013 may have further triggered housing sales. HOUSING AND HOUSING SALE Thousand 400 300 200 2010 2011 2012 2013 2014H1 Price-to-Rent Price-to-Income 2 130 120 0 110 2010 2011 2012 2013 Income 2nd Hand Price New Housing Price Inflation Housing Sales SOURCE: The data were compiled from REIDIN and TURKSTAT. Second Hand Price Growth 3
HOUSING PRICE, CONSTRUCTION COSTS, INTEREST RATES In terms of new housing production, an increase in construction costs is normally expected to be reflected in sale prices. Although increases in housing prices and construction costs displayed similarities, it is observed that new housing price growth was higher after 2012, whereas the gap has decreased since the beginning of 2014. In terms of housing price growth and change in the interest rate, the constant growth in housing prices continued although the interest rate fluctuated. Particularly, housing price growth accelerated with a falling interest rate in the second half of 2012, but later housing prices kept increasing despite a hike in the interest rate. HOUSING PRICES, CONSTRUCTION COST AND INTEREST RATE (2010=) 170 2010= 150 130 110 90 New Housing Price Construction Cost Interest Rate HOUSING SALES, CONSTRUCTION COSTS, INTEREST RATES In terms of the housing sales volume, no direct relation between construction costs and housing sales was observed, however a notable increase in housing sales was recorded after the second half of 2012 when the interest rate began to fall. HOUSING SALES, CONSTRUCTION COSTS AND INTEREST RATE (2010=) 290 2010= 240 190 Other factors that are expected to have had an impact on housing sales were the Urban Regeneration Law and the VAT regulation. The shares of second hand housing sales and mortgage sales in total sales have importance in understanding the dynamics of the housing market. This analysis will give more accurate evidence on the impact of the regulations. Although housing sales statistics published by TURKSTAT began to differentiate between second hand and new housing statistics and between sales with and without mortgage after 2013, the limited data history does not support any meaningful results. In the future, this new set of data will provide more adequate results on this matter. OUTLOOK Excessive pricing created by expectations of higher future returns is generally accepted as the trigger for an upcoming housing price bubble. Based on our analysis on the Turkish housing market, prices are shaped by different market dynamics. The impact of macroeconomic factors, particularly inflation and the interest rate are significant. Furthermore, return expectation and risk appetite of individual investors lead to a different purchasing behaviour and pricing compared to other markets. Although housing price growth remained below inflation during certain periods, there was a correctional trend during other periods. Therefore, housing remains to be considered as a traditional investment tool relatively protected from inflation. Annual average housing price growth was around 14%, while inflation-adjusted average growth was only 4% between 2010 and 2014H1. However, the lagged effect in the recovery period after the global financial crisis should be taken into consideration. Finally, the Turkish housing market should be examined separately in terms of demand and supply balance, because there is a sustained demand resulting not only from strong demographics. In this context, a detailed supply analysis will lead to more reliable results in terms of regional differences throughout Turkey. 90 Housing Sales Construction Cost Interest Rate 4
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