Speaking to the Agos weekly, Professor Daron Acemoğlu -- one of the 10 most cited economists worldwide according to the IDEAS/RePEc project -- noted that the rapid increases in valuations of houses across the country have the potential to cause a nationwide crisis if the prices reach an unsustainable level and suddenly decline, leaving banks with too many bad loans. “Where have we seen housing prices soar when real interest rates are really low? In the US and Spain. … Then what has happened? This must be carefully thought about,” he told the weekly.
According to Central Bank of Turkey's latest figures, housing prices increased at an annualized rate of 11.68 percent in July when consumer inflation averaged at 9.07 percent the same month over a year earlier. In the case of a property bubble when prices see a sudden decline, individuals who took out mortgages to purchase those houses prefer to pass their ownership to the creditor banks rather than sticking with their repayment plan. Heavily burdened with those reappraised properties with market corrections, banks face a liquidity crisis and become unable to service their own obligations, eventually being forced to seek a government bailout.
A Real Estate Investing Partners Association (GYODER) report has recently shown that the volume of loans banks in Turkey extended to people for the purpose of new housing purchases was more than halved in the first quarter of the year to TL 4.8 billion ($2.7 billion) over a year ago. It was TL 9.8 billion the same period in 2011. Overall, mortgages grew at a paltry 2 percent year-on-year in the first four months of the year. The monthly interest rate on those loans saw a mild reduction from 1.25 percent in the first quarter to 1.21 percent at the end of the following three-month period. According to GYODER, people purchased some 96,000 units of housing in the first quarter under these conditions, 5.5 percent more than a year ago.
For Acemoğlu, the anomaly in the domestic housing market comes at a time highly critical for Turkey. “The Middle East and North Africa may re-enter a crisis. Greece and the Balkans are already troubled by one. The Europe, likewise, may be dragged into larger-scale turmoil. Does Turkey have the power to weather all this? I think not. Exactly the opposite, I think we are now heading towards a bubble economy. Although the economy is in good shape in Turkey and domestic demand and bank loans are quickly growing, the real interest rates are too low and they have been for a long time. This seems to me more like a politically reasonable situation,” he said as part of his remarks.
Turkey's gross domestic product (GDP) grew at an average annual rate of 5.4 percent between the years 2002 and 2011. Its economic growth, however, slowed to 3.2 percent in the first quarter of this year, from the 5.2 percent observed in the previous quarter. Joining forces, the government and the central bank, however, had to aim for this slowdown with a set of fiscal and monetary measures they implemented after the country's phenomenal decade-long economic growth also came with a barely sustainable current account deficit (CAD) and double-digit inflation at the end of last year.
On the back of that slowdown and also as a result of the country's improving terms of trade, the national CAD -- or its savings gap -- dropped more than a quarter to $27 billion in the first five months of the year over 2011. Increasing service sector revenue -- particularly that earned in tourism -- also made a notable contribution to narrowing the gap. According to the Turkish Statistics Institute (TurkStat), Turkey's foreign trade deficit shrank some 22 percent to $28.9 billion in the January-May period year-on-year, during which net services revenue increased by nearly a quarter to $4.5 billion.
Inflation, however, proved more stubborn. According to the latest data available from TurkStat, annualized consumer inflation increased to 9.07 percent in July, from 8.87 percent in June.