Affordable Housing Institute : US

[Continued from the previous Part 1 and Part 2.]

After I’d spent a day listening to the first panelists at the Turkish Real Estate Summit in Istanbul, I’d concluded that my hosts wanted to hear about both the impact of the new mortgage law, and what Turkey could do to promote housing affordability.

So I rewrote my presentation, adding half a dozen slides.

Do you know how hard it is to put PowerPoint on parchment?

I started off with the good news:

“I’m from the US and let’s start with the good news.”

Good news: property values are likely to boom. Assume governmental stability (with Turkey, that’s still a complex proposition not readily discernible by foreigners) and stable macroeconomic policy. Then, as I wrote in my Harvard International Review article, when capital is given an enabling environment, interest spreads compress. From that 2005 Foreign Direct Investment article:

According to Mert Ulker, a certified financial analyst at brokerage house TEB Investment: “Availability of longer-term consumer financing at historically attractive rates has unleashed the pent-up demand in the (housing) industry.”

Unleash the housing demand!

Most Turkish banks now see long-term housing finance as one of the few areas where they will be able to make profits. Currently, banks give out housing loans as consumer credits, financing loans from their own assets or by borrowing from local and international money markets. But experts say this poses enormous risks.

Let me translate that last statement, because it’s a remarkable example of national amnesia similar to South Africa’s.

· “Consumer credit” means you’re lending money to a person, based on that person’s ability to repay, independent of what he does with the money. Loan sharking is consumer credit distilled to its essence.

· “Collateral credit” or “housing finance” means you’re lending money to a person based on the collateral of an immovable piece of property. Sure, you want the borrower to repay, but if the borrower defaults, you have a marketable asset — a piece of property.

Using a consumer-credit approach to lending for home mortgages means ignoring the property, and making no credit distinction between somebody who uses the money for a drug habit and somebody who buys an immovable and durable house. It’s a loss of risk assessment so massive it would be totally unbelievable … if the exact same thing hadn’t happened in South Africa after the big four banks swallowed all the building societies. (I remember my jaw dropping when my South African friend Bob Tucker, whose family had run the Permanent Building Society for generations, described how all that expertise dissipated after the Perm was bought.)

Back then, they knew how to underwrite real estate loans.

Put it all together and the results are obvious: property values will rise. As reported in the Financial Times:

If its limitations are addressed, the law’s impact could be profound. Only about 3% of housing construction in Turkey is currently financed by mortgage credit. Around two thirds of Turkish people finance their home purchases through their own and family resources.

It’s virtually self-evident that if people are financing on their own, without tapping real estate equity, their aggregate borrowing capacity is limited. Limit the flow of capital, especially through that most illiquid of assets (immovable property), and prices are likewise low.

In the short term, analysts said, several factors would keep demand for mortgages low. One is interest rates. Currently, the cheapest housing loans for buyers incur monthly interest rates of between 1.5% and 1.7%. [18% to 20% — Ed.]

There’s no question these are high spreads in real terms — they’re 800 to 1,000 basis points above inflation. But as the old Henny Youngman joke goes, “Compared to what?”

Economists said rates would need to fall close to 1.0% before there was a rush to take out mortgage loans.

Und zen zere is a matt rusch to take out mort-gage loanz

Call me very skeptical [You’re very skeptical! — Ed.] of these unnamed ‘economists’ that takeup will be slow, or that if it is slow, interest rates will be the reason. If you’re borrowing from your relatives, even at a nominal interest rate, and paying the loan back in (say) five years, your debt service constant will be 30% or more. Offer someone a thirty-year mortgage at 18% and her debt service constant will be 20% or less. When people’s salaries can buy half again as much house, they are going to want to buy houses.

Similarly, people who already own property, financed or not, will suddenly discover they have an enormous financial asset. As anyone who’s ever refinanced in the US knows, equity that can be accessed is accessed, for children’s college education, home improvement, or new business establishment (something like two-thirds of all US startup businesses do so by tapping home equity). Adding liquidity to the most valuable asset people own will lead to substantially increased business activity on a self-reinforcing basis.

When I add liquidity, the market steams up

The law allows for the securitisation of mortgages, which will help to increase the liquidity that banks can make available to borrowers.

Securitization isn’t the only way to achieve secondary-market liquidity, but it’s the most advanced and in many ways the best approach, because it distills risk into the originator/ securitizer, thus expands the capital market, and lowers the overall Weighted Average Cost of Capital to borrowers.

Istanbul is likely to boom the most. Not only is it the country’s financial center, tourist gateway, most Europeanized, and richest city, it also has been designed as the European Capital of Culture 2010.

This designation, though the purest vaporware, is a civic gold star that draws continental attention; and like all such metropolitan designations, it stimulates civic pride and reinvestment. Istanbul will be titivated, and with that plus all the foreigners coming to look, property will boom.

Also likely to boom is foreign investment in vacation property, particularly along the Aegean coast. Another speaker on my panel was Jack Hamilton, CEO of Parador Properties, which sells holiday flats to British expats seeking holiday and retirement sun — which Turkey has in abundance.

Jack Hamilton’s the other guy wearing UN headphones

Parador started in Spain and has recently expanded into Turkey, where it is experiencing the fastest growth in its history. Most of this financing is likewise primitive — 50% up front, and the balance funded by the buyer using offshore money — and as that market seasons, the financial products will become more attractive (I suggested to Jack that Parador could make a nice little business lending the second 50% to its customers and securitizing the balance), and that too will boost prices. “Turkey is the new Spain,” Jack concluded, and I believed him.

The bad news: the affordability gap will widen. “Your market will boom,” I told the audience, and this is good. “On behalf of the US of A, thumbs-up to making money. But – as you raise the value of market housing, that makes it an equal amount harder to create affordable housing.”

Land prices up, property values up, affordability down

From my Istanbul slides

Paraphrasing Nic Retsinas, I said that Turkey was heading for a two-tiered society of owns and own-nots, with the owns becoming more wealthy, and the own-nots falling farther behind. This meant, I said, that as markets get strong, government must step up its financial commitment to affordable housing —

If you want affordability, government has to be involved

From my Istanbul slides

— and that this should best be done in public-private partnership, because markets and government have complementary capacities and weaknesses.

What markets are good at and bad at. Markets are terrifically smart, with distributed intelligence, and move like lightning. They compete with each other — a charmingly simple trait that government can harness if it’s smart. They’re terrific at building, raising capital, thinking big.

Why we like markets

From my Istanbul slides

At the same time, markets are utterly uninterested in affordability for its own sake. To care about poor people, they need to be paid, more or less as much (on a risk-adjusted basis) as they would be paid for caring about rich people. They similarly don’t care about good policy outcomes, except insofar as it enables them to make profits.

Why we don’t entirely trust markets

From my Istanbul slides

What government is good at and bad at. Conversely, government protects the public interest, deploys public resources, and holds the public trust.

What government must do

From my Istanbul slides

Government also takes non-commercial risk — and this is its principal added-value proposition in affordable housing. Giving out subsidy is all well and good — it’s the mother’s milk of development — but the value of subsidy is roughly the amount given away. Whereas, when government takes non-commercial risk, there is value gained, because the market’s perception of that risk is much higher than the real risk, so by stepping into the breach government makes markets more efficient.

A specific example? Those very high interest rates. Were the Turkish government to adopt some form of credit enhancement, whether by mortgage insurance or other weaker forms, it could immediately cut interest rates for a targeted group of borrowers, without necessarily spending any of the public’s cash. Such a program of Loss Limit Insurance would be among my recommendations, if I were brought back to help the Turks figure out what they want to do to expand their affordable housing ecosystem (more on this in Part 5 in a couple of days).

Conversely, government is bad at a lot of things:

Where government struggles

From my Istanbul slides

Compared with markets, government moves slowly — which means it must reduce the number of decisions it makes, and make policy decisions, not real-estate-tactical decisions. This makes government generally a bad owner/ operator — I showed my hosts slides of Columbia Point, Pruitt-Igoe’s 1972 implosion, and a similar 2002 demolition in London. Thus government cannot and should not replace markets, nor even necessarily compete against markets (which many of my hosts said TOKI was doing, and with huge embedded advantages like the power to control zoning, and favorably rezone its own property), but rather work in public-private partnership.

Repeatedly throughout the conference I was told that housing affordability was a big, big issue in Turkish real estate, and my talk — delivered in slow English and with excellent simultaneous translation — was very well received. But amid all this cheer, I said, there is however a huge unvoiced problem and a great unspoken risk (and it’s not the political one):

Is there a risk that dare not speak its name?

Political update: Unexpectedly, Turkey’s supreme court has annulled the previous Presidential vote:

ISTANBUL, Turkey (AP) — Turkey’s highest court on Tuesday annulled a presidential vote that had been dominated by concerns about the rising profile of political Islam, opening the way for possible early general elections.

The ruling was issued after the opposition boycotted the vote on Friday, and after huge protests by hundreds of thousands of pro-secular Turks against the Islamic-rooted government of Prime Minister Recep Tayyip Erdogan.

The decision represents a setback for the government, which had hoped to strengthen its authority with the election of Foreign Minister Abdullah Gul to the presidency.

Governing party figures have said they were considering early general elections to defuse tensions with the military-backed secular establishment.

Media reports said the government planned an announcement later Tuesday.

“We’ve canceled the first round” of the Parliament’s presidential voting, court spokesman Hasim Kilic said. “Whether the Parliament will continue the vote or not, we can’t know.”

In its ruling, the court accepted the leading opposition party’s argument that the vote was invalid because a quorum of two-thirds of Turkey 550 legislators was not present.

“Our court ruled that a quorum of 367 was necessary,” Kilic said.

Aside from the tactical — Mr. Gul’s candidacy has obviously been dealt a severe setback, and apparently Wednesday’s vote is being postponed — the court has now in effect given minority parties a filibuster-like veto over the Presidency. I have absolutely no basis for opining how this squares with Turkish law, but it encourages compromise and centrist candidates.

As Henry Clay proved, America was founded on the spirit of compromise …

But as Henry Clay discovered, some things like the Compromise of 1850 do not hold long.

[Continued tomorrow in Part 4.]

Send post as PDF to