How will low rates affect the housing market?
There is a question that we frequently come across after the state banks have lowered the home loan interest to 0.99 percent monthly. The question is whether this interest rate cut will increase demand for homes and therefore whether housing prices will increase.
In our opinion, there will be no increase, because this credit interest seems low for the current period but is still high in the long term. Let us not forget that the Central Bank’s 2020 inflation forecast is single-digit, although it is unlikely to achieve it. CPI is estimated to be 8.2 percent in 2020. And again, let’s not forget, the ultimate goal for Turkey’s inflation is 5 percent. If inflation falls to single digits and stays
there after a few years, can we say that a 12 percent mortgage loan annually is advantageous?
Moreover, although the exact number is not known, the housing stock is estimated to be over a million. And there are hundreds of thousands of households that cannot afford to buy housing even with interest-free loans, not 0.99 percent. There are people who have stopped dreaming about home ownership. The number of applicants to three state banks in two days was 13,000. If this figure was 113,000, for example, we could talk about a big demand. Therefore, sellers in the housing market will be reluctant for a while against this credit facility. We can see that. But this attitude will change in a very short period of time.
Average interest will drop slightly
The extent to which the monthly mortgage loan rate of 0.99 percent initiated by public banks will become widespread is difficult to predict, but this practice will definitely lower the average mortgage interest rate. There is already a general fall in interest rates; this move by public banks will also support the decline.
The trend is clear: the decline in deposit and loan rates, which began in July, will continue and accelerate. This decline is not attributable to a single factor. There are many reasons for it, but the main reason obvious: annual inflation is in decline and will further decline.
Associating this decline in the annual rate with the Central Bank’s interest rate cut would be oversimplifying. We have always stressed that inflation would come down due to the base effect, and it is coming down. Is it possible that banks haven’t noticed? Of course they knew that the annual CPI increase would eventually decline and began positioning themselves accordingly by predicting interest rate cuts in July.
The replacement of the Central Bank governor and the fact that the policy rate was lowered more than expected undoubtedly encouraged the banks to lower their rates. It would not have been wise to apply high interest rates on deposits while providing short-term and low-cost funding from the Central Bank.
Looking at the situation at the end of each month for the first six months, only one-year and longerterm deposit interest rates rose in the week of July 12-19. However, this increase was also very low.
The ratio of all banks in deposits and the average of all deposits has decreased to 20.09 percent as of July 26. In addition, all maturities, except for deposits up to three months, are below the 20 percent threshold. The Central Bank announcement on August 2 will clarify the picture, and we will probably see less than 20 percent for all maturities on that date.
Long-term maturities will be profitable
When interest rates began to decline, we had a suggestion for savings holders. We suggested that those who do not receive a return on their savings on a monthly basis should go for six-month on annual term. Because after a period of time, when the maturity date arrived, they would have to settle for lower rates. Indeed, it happened and this trend will continue. However, for example, a relatively high interest rate could be guaranteed with a six-month maturity. We don’t know if anybody tried this, but it’s obvious that those who did are profited.