Affordable Housing Institute : US

[Continued from yesterday’s Part 1.]

The huge turnout at the 25-26 April Turkish Real Estate Summit in Istanbul, sponsored by Gyoder, was proof that there was money to be made, and in 2005 and early 2006, growth was booming:

And when demand is booming, prices go up!

As reported last summer by Foreign Direct Investment Magazine:

In the first quarter of 2006, the construction industry grew a mind-boggling 25.9%, after expanding 21.5% throughout 2005. The growth was spurred by government spending on big public sector projects, such as the $4.1bn Istanbul Marmaray, one of the world’s most ambitious urban rail commuter projects, and outlays on low-cost public housing projects in the country’s 81 provinces.

These direct new construction properties were funded and developed by TOKI, the government Housing Development Authority.

Then in May [2006 — Ed.], severe fluctuations in global financial markets, sparked by an increase in US interest rates, jolted Turkey’s economy. Jittery foreign investors withdrew an estimated $14.5bn in funds from the Istanbul Stock Market in a month, as share prices tumbled by a third, and the new Turkish lira lost 17.3% against the US dollar in 10 days.

We Americans forget the ripple effects caused by the extraordinary strength and scale of the US capital markets, and in particular our residential property markets. (As I’ve noted before, combined debt issued by Fannie Mae and Freddie Mac exceeds that of the US Treasury!) We also forget that global investors tend to presume that any sneeze in the US markets is probably a harbinger of severe colds in other markets.

These prophecies are self-fulfilling — few stock markets can take such a large sudden outflow of capital without suffering a price drop.

Karnak say, “Pull money out, stock go down.”

(That explains why one conference panelist was asked to speak on “the US subprime problem: its implications for Turkey,” to which the answer, provided by a senior banker from Wachovia Securities to his and everyone else’s general relief, was, “probably none.”) Anyhow, the shakeout immediately hit interest rates:

The crisis prompted the government to rescind a 15% withholding tax on foreign purchases of Turkish securities to lure back the investors’ funds. The Central Bank of Turkey raised interest rates on overnight borrowing from 13.25% to 17.50% to prevent further haemorrhaging of the lira, bring inflation under control and stabilise the market.

Bucking up the currency is understandable; as collateral damage, it chokes off borrowing.

Matters were made worse by the [2006] failure of the national assembly to enact legislation that would create a legal mortgage system in Turkey. The mortgage law, which was supposed to have come out last autumn, would have allowed the country’s banks to securitise housing loans and tap long-term foreign funding for housing finance to encourage home ownership and stimulate economic growth.

Put them together — withdrawal of capital from the stock market, failure of a reformed mortgage law — and the banks got scared of housing. What do frightened banks do? They raise rates.

The changes in the economic conditions motivated Turkey’s 49 banks to raise yearly interest rates on 20-year housing loans from 11.88% in mid-May to as high as 28.2% in mid-July.

From the OECD: look at the inflation declining, look at the generally falling interest rates

Fortunately, the new mortgage law has been enacted. As reported in the 22-Feb-07 Financial Times:

Mortgages will soon become available in Turkey for the first time after parliament passed a new law that could transform both the housing market and the country’s urban environment.

The law, adopted late on Wednesday and due to come into effect on January 1, 2008, will make mortgages available over long periods to house buyers who until now have had to rely on family borrowings or expensive short-term home loans from banks.

“This is one of the biggest reforms of the Turkish finance system,” said Abdullatif Sener, a state minister responsible for economic affairs.

Its immediate impact on a nation undergoing a construction boom, where demand for housing is soaring, may be limited, but its long term impact would be profound in a nation with a deep love of real estate and where 70% of families own their own homes. “This is potentially a major piece of social legislation,” said Wolfango Piccoli [scroll down], an analyst at Eurasia Group, who follows Turkey closely.

I’ve previously written (in Harvard International Review) about government’s four essential roles, of which the second is Enabling Environment for capital.

A to-do list for aspiring liberal democratic governments.

From my Istanbul slides

As I wrote in that article:

Housing is particularly challenging for capital to assess because housing has the longest return cycle of any asset class, ranging into decades; and, unlike other assets, it is not portable, so the lender cannot readily repossess it. Non-portability causes the lender to have to evaluate collateral and reclaim possession on site, adding cost and risk to the credit decision and lending process.

To develop capital, governments need sound macroeconomic policy, a currency not prone to massive deflation, reliable capital markets, means of aggregating financial instruments and selling financial investments, a robust banking and investment banking system, and a diversity of real estate capital forms—such as mortgages, loans, and bonds. Governments can stimulate these markets through state-established housing finance entities such as Mexico’s Sociedad Hipotecaria Federal (Federal Mortgage Company) and Thailand’s Government Housing Bank or smaller secondary market makers like Malaysia’s Cagamas.

In Egypt, for example, the Egyptian government and the US Agency for International Development are struggling to reform an anachronistic deeds-owned system that compels a buyer to maneuver through a 77-step registration system before emerging with a secure title to an urban property. Typical Egyptian home financing is seven years or less, provided by the builder or seller rather than a bank. As a result, homes transfer infrequently, which leads to huge mismatches between Cairo households’ current housing needs and their housing consumption. Governments must cut through red tape to create capital and financial markets that enable speedy and low-cost exchanges of future promises for present capital. When appropriate markets are in place, people finance housing and are willing to borrow large sums for long periods in order to own homes.

If the right structures are in place, people turn homes into money and money into homes

The new mortgage law will suddenly make capital broadly available for housing. From an anticipatory 2005 article in Foreign Direct Investment:

“The mortgage system will be a sustainable financial model for the housing industry, banks and the public,” says Haluk Sur, [2005] chairman of GYODER and president of Ihlas Real Estate Investment Trust, one of Turkey’s leading property developers. He says that 60% of the country’s 75 million inhabitants will benefit.

High inflation, combined with steep interest rates, has constrained the housing market and eroded the personal savings of millions of Turks for a generation. From 1978 to 2001, annual inflation based on consumer prices averaged anywhere between 47% and 125%.

Hard to make the economy fly when you’re dragging high interest rates

Runaway inflation is an incredible demotivator, and as such, a complete drag on the economy:

“In the 1960s and 1970s, a civil servant could buy a house with his retirement compensation and pension. In the 1980s, he could buy only a car. In the 1990s, his retirement compensation was enough only to purchase a few household appliances,” says Mr Sur, a civil and environmental engineer.

The new law effectively creates a residential lending sector:

Under the draft law on mortgage finance, banks and leasing companies will provide long-term mortgage loans and lease-like credits to prospective home buyers, covering up to 70% of the total cost of their homes. The home owner will have to meet at least 30% of the cost in advance. The banks and leasing companies will sell the mortgage contracts to a pool of new mortgage finance companies that are to be established, which will issue bonds, asset-backed securities and mortgage-covered bonds on the domestic and international markets to institutional investors, such as insurance companies and pension funds, to provide long-term funding.

Coupled with other recent developments, what does the new mortgage law mean for Turkey’s real estate markets generally, and for housing affordability specifically?

What’s it all about, Alfie?

After a day at the conference, I decided that was what my hosts wanted me to talk about, so …

Political update: On Monday, 30-Apr-07, the Turkish lira dropped precipitously.

The main ISE National 100 index lost 8% of its value upon opening and the lira dropped as much as 4%.

Hundreds of thousands of people rallied in Istanbul over the weekend to protest against the candidacy of Abdullah Gul.

Protesters in support of secularism in Turkey are concerned that Mr Gul has remained loyal to his Islamic roots.

If the stock market and currency slumps continue, the pressure on Mr. Erdogan will increase. His Monday speech was intended to stabilize the markets.

Also looming is a court ruling on the constitutionality of Mr. Gul’s candidacy:

A second round of voting is due on Wednesday [Tomorrow — Ed.]and the court has said it will try to rule on the appeal before the vote.

If the court upholds the CHP position and cancels the presidential election, the ruling would trigger an early general election.

The business elite has called for an early general election to calm the tensions.

Prime Minister Erdogan appealed for calm, but offered no change in his nominee:

ANKARA (Reuters) - Turkish Prime Minister Tayyip Erdogan appealed for national unity in a television address on Monday, in a clear drive to ease a standoff between secularists and his Islamist-rooted government over presidential elections.

“Unity, togetherness, solidarity, these are the things we need most. We can overcome many problems so long as we treat each other with love,” Erdogan said without making any direct reference to the standoff.

“Turkey is growing and developing very fast … We must protect this atmosphere of stability and tranquility,” he said. Under Erdogan, Turkey has posted strong economic growth after years of weak coalition governments and corruption.

His speech was recorded on Saturday, a day after the army threatened to intervene in the presidential poll process. The army, which sees itself as the guardian of Turkey’s secular system, has ousted four governments from power since 1960.

The AK Party, formed out of a banned Islamist party, draws its core support from conservative religious Turks but has won broader backing for pushing liberal economic reforms designed to take the country into the EU. It swept to power in 2002, months after its creation, on an anti-corruption platform.

I have no real idea about Turkish politics, nor about the secular-religious divides that are of so much concern, and always have been since Ataturk established the modern Turkey in 1923. I can judge only on actions, and Mr. Erdogan’s government has tamed inflation, established monetary discipline, enacted a fundamental mortgage-finance law, and at least warmed up the glacial pace of Turkey’s EU candidacy. Those are reformist actions.

Its foes say it is stealthily promoting religious-minded officials in the state bureaucracy. Gul’s election would remove the last major political check on the power of the government.

Another ballot is scheduled for Wednesday, and if I understand the rules correctly, it will operate on the same basis as the previous one — so we can expect the opposition parties to boycott, Mr. Gul to gain a sufficiency of votes but not a quorum, and the matter to continue simmering.

The election could be headed off if the Turkish Supreme Court rules the recent vote unconstitutional, a ruling that is expected as early as today. However, one indication suggests the court will decline to overturn it:

ISTANBUL (Reuters) - The rapporteur for the Turkish Constitutional Court has recommended the court rejects an opposition challenge to the presidential election, newspaper reports said on Tuesday.

The country’s top court is due to rule on Tuesday or Wednesday on the opposition request to suspend the presidential election. Suspension could trigger an early parliamentary poll and, in the view of many analysts, help defuse tensions between secularists, including the army, and the government.

The newspaper reports said the court’s rapporteur — who acts as a prosecutor in such cases — Hikmet Tulen had recommended the bid by the main opposition Republican People’s Party be rejected. The recommendation is not binding.

The court said it will start deliberating on the challenge at 2 pm (1100 GMT

[Continued tomorrow in Part 3.]

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