“How Mortgage Crises in United States has affected Turkish Real Estate Sector?”

Muhammet Çağlar Kılınç
Cansu Sugün

The U.S Mortgage Crises was characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages. This caused an economic recession and in 2008-2012 it is called Global Recession due to the negative effects in the global sense.

There are number of factors that lie behind these crises in both housing and credit markets. These factors emerged over a number of years. Causes proposed include the inability of homeowners to make their mortgage payments, overbuilding during the boom period, risky mortgage products, increased power of mortgage originators, high levels of debts, bad monetary and housing policies, international trade imbalances, and inappropriate government regulations.

In January 2011 The U.S Financial Crises Inquiry Commission reported its findings. It concluded that "the crisis was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels.“

This crisis is not merely seen as the result of the U.S. housing bubble's bursting or the collapse of the United States' subprime mortgage sector. The credit excesses that created this disaster were global. There were many bubbles, and they extended beyond housing in many countries to commercial real estate mortgages and loans, to credit cards, auto loans, and student loans. There were bubbles for the securitized products that converted these loans and mortgages into complex, toxic, and destructive financial instruments. And there were still more bubbles for local government borrowing, leveraged buyouts, hedge funds, commercial and industrial loans, corporate bonds, commodities, and credit-default swaps -- a dangerous unregulated market wherein up to $60 trillion of nominal protection was sold against an outstanding stock of corporate bonds of just $6 trillion.

The European economy was also affected negatively by the economic downturn. Most economies in the Eurozone experienced a recession in 2009. According to RICS report, House Prices in all over the Europe has gone into downward trend and expecially in th U.K., Ireland and France declined drastically. Also there is a significant decline in the demand for housing. Banks decreased the availability of housing loans. However, real estate market in emerging markets like Turkey and Russia is still promising although affected by the global crises.

Turkish Housing Market

As a developing country, Turkey has been going through wide-scale urbanization since 1950s. Increase in population and migration from rural to urban areas have triggered development in the cities. Today, Istanbul is ranked as the third most attractive real estate investment market among all European Cities.

There are several factors driving or affecting the infrastructure requirements in Turkey. These Factors, amongst others, include the following;

*  Population increase, *  Continued migration from rural to urban areas, *  Natural disasters, *  Renewal of existing housing, *  Modernization and the development of the retail market, *  Increase in the number of multinational and large national companies, leading to office space requirements in the commercial cities, and *  The geographical position of Turkey being a bridge between Europe, Central Asia and the Middle East puts emphasis on the development of the logistics sector and related construction.

The banking crisis in 2001, real estate sector in Turkey had seen bottom level in terms of new constructions. After the Banking crisis in 2001, real estate sector has started recovery period. We can observe this period from construction permits. It is a good indicator for measuring the real estate sector. The number of apartment units authorized by a construction permit rose rapidly from 2002 to 2006 with CAGR(Compound Annual Growth Rate).

The number of construction permits decreased by 12% in 2008 and by 17% in the first 9 months of 2009 compared the same period of the previous year. Although the number of construction permits and have decreased in the first 9 months 2009, the number of apartment units sold in the same period in Turkey has recorded an increase of 25% compared to same period of 2008.

According to Colliers International, the housing market started to improve in the second half of 2009.14 Indeed even in the second quarter of 2009 the number of apartment units sold was surprisingly robust. The aggressive decreases in interest rates in 2009 are believed to have been the leading reason behind the increase in sales.
The gap between housing demand and supply is another positive indicator for the future growth of the sector. The results of GYODER’s study on housing requirements are that supply still does not meet demand in Turkey.

Housing Finance
The sources of housing finance are both institutional and non-institutional in Turkey. Project debt finance, housing loans and mortgages are the institutional financing, while cooperative housing and equity sharing agreements are the non-institutional alternatives.

The level of new housing loans decreased starting from the last quarter of 2008 a result of the recent downturn and the increased interest rates during the crisis period. The negative impact of the increase in financing cost continued in the first half of 2009. Starting from the second half of 2009, interest rates have reduced and this has positively affected housing loans and apartment unit sales. Government has introduced the Mortgage Law in 2007. After that law banks started to provide longer maturity housing loans and consumers have had some tax advantages.
The Effects of Global Financial Crisis on Turkish Housing Market
Due to uncontrolled and rapid financial liberalization approach that occurred in the 1980s, since the beginning of 1990s Turkish economy faced with crises stemming from both external and internal reasons. November 2000 and February 2001 crisis can be both considered as economic downturn that had led to serious damages in Turkish economy. However it has been observed that during 2008 global crisis despite the fact that many countries were facing with huge financial loses and extra ordinary effects, it can be said that Turkish financial markets and real estate sector did not suffer that much and showed relatively better performance.
Declining housing demand in Turkey which began in 2007 has been effective during the election period and the period of political stagnation, economic uncertainties. As a result of all these adversities economic downturn that began in 2007 (4.7 per cent), continued in 2008 (1.1 per cent). In the first quarter of 2009 GDP contracted by 14.9 percent and had hit rock bottom and following-up the three term growth trend

As we can see from the figure the construction sector has been incomparably affected more than agriculture, manufacturing industries by the financial crisis. In spite of the fact that the construction sector has been ranked as the first industry in terms of real growth rates, it has been declined to fifth place in the first quarter of 2009.

Global residential housing sales figures analyzed as follows: The effects can be seen in more detail during crisis. The decrease in house sales starts during the second quarter of 2008 and sees 92.516 level in the last quarter of 2008. The increasing sales figures in the first two quarters of 2009 goes back to 111.913 and sees 85.857 level in the first quarter of 2010. Then it starts rising

Table- House sale statistics
When we observe Relative changes in housing prices data below we see that 1,4 percent decrease in overall housing prices increases by 19,6 percent in 2008. After the year 2008 when the housing prices made its peak the housing prices decreases progressively in 2009 and 2010.

Figure. Relative Housing Price Change
Although construction sector had suffered from the 2008 Global crisis one may observe that Turkey has relatively better economic conditions at the end of 2010 compared to the crisis countries. Also construction sector did very well taking the expected serious scenarios into consideration. Within this scope it has been increasingly observed that Istanbul is a rising star in the global real estate markets.
So how did Turkish housing sector succeeded not to be affected tremendously and to recover as soon as possible. Was there a fundamental transformation in the market structure or a successful crises policy or whether the Turkey is one of the luckiest survivors of the global crises. From now on we are going to answer those questions.
The first thing to be considered within this scope is the sociological and psychological background of the Turkish commonsense about real estate investments. Turkish people traditionally prefer to invest in real estate over the alternative investment opportunities. The generally accepted housing investment understanding in Real Estate sector according to rural areas is that the real estate is accepted as the most preferred and valuable asset. The motive behind this consumer behavior is related to the protection of savings from adverse impacts of high inflation rates and negative real interest rates which dominated the Turkish economy since the beginning of 1970s. One disadvantage that stems from this point is real estate market is growing at the expense of Financial Markets.
Significant effects on the domestic demand for real estate in Turkey which are important for a long-term market development are stemming from substantial population growth, young population and immigration to urban areas, growing demand for affordable housing, urbanization, industrialization, urban renewals and niche residential demand. Also with regards to a dynamic socio economic structure that is formed by the listed affects the demand for industrial and commercial real estate.
The other things that impose strength and dynamism to Turkish housing sector are growing Foreign Direct Investment to domestic real estate market especially on commercial real estate investments, rising residential prices, increasing supply of residential units and shopping center and the production growth in social housing. In the below figure we see the effect of FDI to the real GDP growth rate. The most important concept that is to be emphasized within the concept of recovery and being affected less from the global crisis is the inefficient linkage between Finance and Real Estate sectors in Turkey. Although statistical data had shown that financial crisis created negative impacts to macroeconomic variables in Turkey, those effects have relatively limited due to the sound banking system, less financialization in state sectors, companies, households. According to the Tüsiad report by year 2008 housing loans and institutional housing finance has only a 3% share within the total number of private homes in Turkey that is the self-finance is the fundamental finance method in the Turkish housing finance system. In spite of the importance of housing investment and contributions of the real estate market to long term savings and economic growth, the link between the real estate market and domestic financial markets seem weak in Turkey. We can see this relation by examining the table below.

Table. Household Liabilities to GDP in Selected Countries (2005-2007)
To conclude, because of the fact that capital markets have been displaying dysfunctional characteristics, the Turkish economy was not exposed to overall problems during the global financial crises. Many authorities state that Turkey has faced relatively limited negative impacts from the global financial crises due to * Lack of securitization

* Structured product markets

* Inefficient housing credit

* Structurally less developed mortgage market

Resources:

1. By Joseph Stiglitz Special to CNN (2008-09-17). "Time-Stiglitz". Cnn.com. Retrieved 2009-02-27. 2. Financial Crisis Inquiry Commission-Press Release-January 27, 2011. Roubini, Nouriel. "Roubini – More Doom Ahead". Foreignpolicy.com. Retrieved 2009-02-27. 3. Royal Institution of Chartered Surveyors, European Housing Report 2009. 4. Deloitte Turkish Real Estate Report, 2010 5. Global Economic Crises and It’s effect on Turkish Real Estate Sector, Ercan Sancak, Erkan Demirbaş, 2011 6. Colliers International Turkey Real Estate Sector Report, 2009 7. GYODER Real Estate Research Report 2, 2009 8. ULI and PWC (Urban Land Institute and Price Waterhouse Coopers), 2009.

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[ 1 ]. By Joseph Stiglitz Special to CNN (2008-09-17). "Time-Stiglitz". Cnn.com. Retrieved 2009-02-27.
[ 2 ]. Financial Crisis Inquiry Commission-Press Release-January 27, 2011.
[ 3 ]. Roubini, Nouriel. "Roubini – More Doom Ahead". Foreignpolicy.com. Retrieved 2009-02-27.
[ 4 ]. Royal Institution of Chartered Surveyors, European Housing Report 2009.
[ 5 ]. ULI and PWC (Urban Land Institute and Price Waterhouse Coopers), 2009.
[ 6 ]. Colliers International Turkey Real Estate Sector Report, 2009
[ 7 ]. GYODER Real Estate Research Report 2, 2009