Price Bubble in Residential Property Market?

cushman and wakefield logoThe ‘existence of a price bubble in the residential property market’, which has led to serious debate in connection with the real estate sector of Turkey, in the recent years, continues to maintain its place on the agenda. Cushman & Wakefield, which continues to add value to the sector with the national and international reports it prepares, has expanded the “Residential Property Sector of Turkey: Residential Property Bubble” report, the first of which it had published in 2014, with data from the IMF and the OECD. The report, which has gained a new perspective together with the global data, has once again brought to the table the subject of a price bubble in residential property, which has come back on the agenda with the process of urban transformation.

The report looked into the price / rent and price / revenue rates, which are accepted as being indicators of a price bubble in the global markets, and compared data such as residential property prices and sales volumes with the costs of construction, interest rates and inflation, evaluating the matter within the light of the macroeconomic data of Turkey. In contrast with the report which was published two years ago, the data of the IMF and that of Turkey were compared in order to make a comparison with the international markets. Residential property prices were interpreted on the basis of the cities throughout Turkey, and on the basis of the districts in Istanbul, enriching the content of the study even further.

Increase in prices does not constitute a risk for economy

Tuğra Gönden, Cushman & Wakefield Turkey
Tuğra Gönden, Cushman & Wakefield Turkey

Tuğra Gönden, the Managing Partner of Cushman & Wakefield emphasized in the report that the risk of a residential property bubble, which is expressed in terms of the rate of increase in residential property prices being much higher than that of rents – a subject which has been debated for a long time – is not the case for Turkey. She also stated that the fundamental issue in Turkey was whether the price increases in the residential property sector were sustainable or not. Gönden pointed out that, in contrast with the global markets, the increase in residential property prices in Turkey did not constitute a risk for the economy, and continued as follows: The rate of home loans to the GNP in Turkey is around 6 percent. This rate is around 50-60 percent on average, in the world. That is to say, even if the increase in residential property prices in Turkey reaches the levels seen abroad prior to the global financial crisis, as the rate of the loan market in GNP is low, it does not yet have the power which can have an impact on the loan market.”

The analysis was performed, taking 2010 as the starting year. While residential property prices and rents have shown a continuous increase, it is stated that these increases have been even more distinct since 2013. A reminder is made that legislation has also had an impact in the increase in residential property prices in recent years, and these laws are listed as the change in VAT, which came into effect in 2013 and in particular the Urban Transformation Legislation numbered 6306, which came into effect in May 2012.

Urban Transformation has increased sales and rental prices

Toğrul Gönden, Cushman & Wakefield Turkey
Toğrul Gönden, Cushman & Wakefield Turkey

The reason for the increase in 2nd hand residential property prices is said to be the demand created by the investors who wished to become a partner in the returns of the buildings, which would be renewed and the values of which would increase during the urban transformation process. Again according to the report, the temporary need for housing of homeowners who were forced to change homes with the impact of urban transformation, caused rents to rise.

According to the results, while per capita income has risen by 67 percent in the last 5 years, it has been determined that 2nd hand residential property prices doubled during the same period. On the other hand, it is conspicuous that the 58 percent increase in the prices of new properties, is less than the increase in income.

Apart from urban transformation, construction costs and the increases in the interest rates and the foreign exchange rates have also had an influence in the increase in sales prices, and Toğrul Gönden, the Managing Partner of Cushman & Wakefield, has underlined the 55 percent increase in construction costs. Gönden made a reminder that most of the new projects were being built in peripheral regions due to the lack of estates and increasing land prices in the central regions, and stated that the increase in the prices of new residential properties had remained relatively lower as a result of this.

The return period in residential properties has risen from 16 to 18 years

It was determined in the report that the average return period of a residential property investment was 18 years and that residential property investment values were equal to 8.6 years of average income, while in the previous report it had been stated that the period of return was 16 years and that investment values were equal to 7 years of average income.

The report also compared the data of Turkey with the data of the IMF, and Turkey was among the countries which had experienced the highest rises in prices. It was also presented as one of the countries where difference between prices and incomes was growing at the fastest rate.

The analysis showed that when looking at it in terms of second hand prices and rents in Turkey, the country displayed a difference from the other markets, and a reminder was made that the price / income balance was giving negative signals. It was also stated that the loan interest rates in the range of 1,35 – 1,40 were having a negative impact on the sales of residential properties using home loans.

Turkey is in 6th place in terms of the increase in residential property prices

According to the IMF data as of the end of 2015, Turkey was in 6th place among the countries where the highest annual increase in residential property prices had been seen. While the countries at the top of the list were Qatar, New Zealand and Hong Kong, residential property prices fell by more than 30 percent in Russia, the United Arab Emirates and Ukraine.

The cities of Turkey where residential property prices increased the most were Istanbul, Adana, Yalova and Antalya, respectively. On the other hand, Isparta, Kahramanmaraş and Sinop are among the cities where the difference between the increase in sales prices and rents of residential property was the highest.

Kadıköy leads the way in price increases

When an assessment is made from 2012 to today, the increases in almost all of the districts of Istanbul have exceeded 100 percent. The districts at the top in this list are Kadıköy, Sarıyer, Zeytinburnu, Maltepe and Fatih, respectively. Urban transformation activities possess a significant share in many of the districts where the increases have occurred.

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