REAL ESTATE BOOM IN ISTANBUL GOING THROUGH THE ROOF

UNCLAS SECTION 01 OF 02 ISTANBUL 000956 SIPDIS STATE FOR EUR/SE AND EB/IFD TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER E.O. 12958: N/A TAGS: EFIN ECON EINV TU SUBJECT: REAL ESTATE BOOM IN ISTANBUL GOING THROUGH THE ROOF REF: ISTANBUL 00798 ¶1. (U) Summary: Real estate in Istanbul is flourishing, as property prices have on average doubled in the past two years. A confluence of demographic, economic, financial, and structural forces have come together to make owning housing increasingly desirable. The most important of these is the fall in interest rates following the 2001 financial crisis. In response to increased demand, the price of real estate in Istanbul since 2004 has skyrocketed. Before the recent interest rate increases and concomitant suspension in demand, market analysts expected this appreciation to continue at a pace of at least 10% per year through 2010, with prices in some areas increasing much more dramatically. End Summary. -------------- A Story of Increasing Demand -------------- ¶2. (U) After 1999, demand for real estate began to take off in Istanbul. Following the Kocaeli earthquake that killed over 17,000, people began looking for earthquake-resistant construction. At the same time, Istanbul,s population also continued to grow steadily, increasing the need in housing stock. The Association of Real Estate Investment Companies (GYODER) estimates the number of households in Istanbul will increase from 2.9 million in 2005 to 4.1 million in 2015, resulting in a need for 1.2 million new dwellings simply from population growth. Finally, approximately 200,000 houses will be needed to replace naturally ageing structures. ¶3. (U) Simultaneously, life-style changes are also contributing to increasing housing demand -- children are moving out of parental dwellings in search of their own abode, and car ownership is increasing the distance that families can commute. The Turkish word for home is Ev;, the word for getting married is Evlenmek., This shared root reflects how housing is a cultural value for Turkish people, and that those who can are jumping into the market. ¶4. (U) Economic changes, however, are perhaps the most significant factor in rising real-estate demand. First, Turkey suffered a severe economic crisis in 2001, depressing housing prices and halting new construction. The ensuing economic recovery and reforms instituted by the GOT, however, created a virtuous cycle of declining inflation and declining interest rates. Cash investments thus became less lucrative and real estate relatively more attractive, leading to a resurgence in the market. ¶5. (U) Second, changes in bank requirements for housing loans (reftel) are also giving more Istanbul residents access to financing. By the end of 2005 housing loans averaged $35,000 and totaled approximately $9 billion, representing 2.5% of GDP. Money is flowing into the sector, spurring heightened demand for existing housing and driving new construction. -------------- Tremors To the Good News -------------- ¶6. (U) Since mid-May 2006, however, market volatility has slightly discolored this rosy picture, leading to an increase in interest rates. Prior to the turbulence, banks charged around 1.07% per month (corresponding to an annual compounded rate of around 14% ); at the end of May, banks are charging around 1.30% per month. Until this turbulence settles, demand may be dampened as higher interest rates discourage potential investors. -------------- Still Room to Grow -------------- ¶7. (U) Nevertheless, there remains great upward potential in Istanbul,s real estate market. Current bank-provided housing finance can only be used for legal structures. Yet GOYER estimates that 52% of housing in Istanbul was built without permits. This limits the number of properties for which a bank housing loan can be used, placing further upward pressure on prices. New construction, however, is now generally carried out with permits, thereby qualifying for bank housing loans. This change in practice is also contributing to an expanded pool of available housing that prospective home-owners can purchase through financing, adding to the real estate boom. ¶8. (U) In addition, financing options are evolving. Legislation modernizing the mortgage market is expected to soon be passed by Parliament (reftel). Yasar Buyukcetin, Chairman of RealtyWorld in Turkey, predicts a perfect mortgage system, will be in place within one and half years. If this happens, even more prospective home-owners will have access to capital and invest in real estate, so long as interest rates remain affordable. Experts see these forces causing the upward trend to continue at least through 2010, if not 2015. -------------- The Scaffolding Removed -------------- ¶9. (U) Looking forward, market experts foresee real estate prices continuing to rise, though perhaps with smaller annual increases, especially following the recent interest rate increases. Fatima Umut, a city planner by training and head of Research and Investment for Remax Inc. in Turkey, estimates that growth in property prices and in property registrations should be around 10% per annum for the coming years. She cautions, however, that prices in some places have already soared as a consequence of the hype and market revaluations. ¶10. (U) Housing remains accessible, however, to only the relatively affluent. Market analysts predict the next stage in real estate development will come from housing destined for the middle and lower economic echelons. This will be possible once the mortgage market comes in line with international standards. Real estate developers see this segment as having the most growth potential, with the market for luxurious residences gradually becoming saturated. ¶11. (SBU) Comment: This is a time of immense change in Istanbul,s housing market. So long as the recent increase in interest rates does not dampen the market too much, prices are expected to keep rising dramatically. At the same time, such a surge in prices brings with it the risk of greater social and economic disparity. If those at the lower end of the economic spectrum are left behind, it could cause growing friction between the new housing haves and have-nots. End Comment. JONES