Turkey new home demand shrinks on high loan rates

Housing loan rates have been boosted by a 5-6 point jump in Turkish bond yields since the start of the year, due to gloomy global markets and a court bid to close the ruling Justice and Development Party (AKP) -- a pro-business party with roots in political Islam.

"People refrain from borrowing at these high interest rates," said Ali Agaoglu, chairman of Agaoglu Group which had total sales of around $1 billion in 2007. "I can say that (domestic home sales) have dropped almost 50 percent this year."

"Political tensions boosted interest rates and home purchases are always financed by long-term and low-yield loans, in every country. Now even though people have the money they're wary of the political and economic uncertainty," he said.

Annual home sales in Turkey stand around 400,000, Agaoglu said, but this year's sales figure was likely to come way below this. "We see 2008 as the lost year," he said, adding they were also cautious about 2009.

But Gokalp Arslan, at DD Mortgage, a housing finance joint venture between Deutsche Bank and Turkey's Dogan Holding did not agree. "In the last few months there has been a slowdown but the sales of certain residential projects in Istanbul continue."

Housing loan stocks rose to 34.1 billion lira ($28.3 billion) at the end of May, from 30 billion lira by end-2007, higher than a rise of 2.3 billion lira in the same period last year but lower than the rise of 7 billion lira in the peak 2006 period.

Umur Guven at Garanti Bank, one of Turkey's biggest in housing finance, said he observed the slowdown especially in new homes as rising raw material prices in construction left little room for competitive prices.

"Interest rates in housing loans rose to around 1.70 percent from around 1.30 percent (so far this year). Indeed, this has a negative impact," said Guven, a deputy general manager at Garanti Mortgage, adding the slowdown was more obvious in new homes.

"Cost is an important issue in new homes. Land and steel prices have gone up, which makes it difficult for construction companies to reduce prices. But if they can't have lower prices how are they going to revive demand with such high rates?" he said.

Prices of land, copper, steel and cement -- all crucial for the construction industry -- have risen to new highs as tight supplies, robust physical and investor demand boosted many commodity prices.

PLACE TO INVEST

But constructors are betting on sales to foreigners -- now possible again with a recent new law after a ban earlier this year -- as low home prices and living costs in Turkey make it attractive compared to its peers in Europe.

Plus, as an investment, Turkey is still very attractive.

"If you look at the country's growth rate, economic fundamentals, it's strong enough to weather the storms," said Adrian D'Enrico, European research analyst at Cordea Savills, part of British property services firm Savills.Â

He said that Turkey was a "very good potential story" once political tensions ease.

Constructor Agaoglu agreed. He said the market for foreigners looked favourable, especially after the new law passed in early July allowing foreigners to buy real estate, after the Constitutional Court halted sales in March.

"Turkey has a great price advantage... There is significant interest from foreigners towards Turkey for the second home, both because of the low prices and the level of living costs," he said.

A major market for second homes in Europe, Spain, is almost saturated and both house prices and living costs have jumped tremendously in the last few years, which prompted foreigners to look elsewhere, Agaoglu said.

He is targeting foreigners with a new residential project in Bodrum -- a popular holiday spot in southwestern Turkey -- where the price per square metre is around 2,000 euros, compared to 5,000-6,000 euros in Spain.