House prices soar but for different reasons

E Housing prices soared, and people have begun asking if there is a bubble. Given the current relative stagnation in the residential housing construction business, this question is timely.

E Although there is always demand for homes because people are young, get married, migrate etc. bubbles are formed every now and then in the Turkish market. Ordinarily, bubbles are formed mostly because demand is speculative. In the U.S. house prices go up because there are shortages: not in Turkey.

E Turkish housing bubbles are slow to burst precisely for that reason: housing demand is genuine. Had it been only demand for investment purposes, bubbles would burst fast. It takes about five years for the housing price cycle to run its course. E Could it be different this time? Housing prices are soaring across the globe, but Turkey is an outlier. No country, excluding Luxembourg, saw prices rise as much as Turkey in 2020-21. There are two reasons why prices skyrocketed in 2020 and in 2021.

E First, construction costs immediately went up as the Lira depreciated. Second, the cost increase was ref lected in housing prices because people think prices will rise even more, and buy homes as an insurance policy against high inflation.

E There is a constraint: mortgage rates are high. Many of us would hesitate before tapping banks for loans because mortgages have a long duration. It isn’t like a shortterm consumer loan. Paying high interest rates for many years before any refinancing opportunity becomes available isn’t a good idea. E Those who buy homes are mostly those who don’t need a loan to buy them. They own assets, i.e. nominal assets (TL deposits, FX deposits, bonds, stocks, gold certificates) but they think buying a real asset (a home or a car) with part of their wealth is a good idea.

E This is the scary part. If demand for houses is mainly investment demand, the bubble could burst at any moment.