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Turkey's overall economy might have its weak points, but real estate remains a safe investment bet given the growing demand for housing and scarcity of land in cities, according to a new study from Erste Bank Group.

Turkey's housing market has grown in the past decade as locals and foreigners buy up property, causing construction to boom and land prices to rise. "Increasing demand for housing has also raised land demand," writes Erste. "This has resulted in a boom in land prices, especially in major cities. Land availability is a problem for construction companies, especially in major cities. As land is in short supply, it accounts for approximately 30-40% of total construction cost."

Underpinning this boom is the country's strong economic growth, coupled with declining interest rates and rising disposable income. Other factors include urban migration, a population that is forecast to grow 1.3% per year to reach 76m by 2013, and falling household sizes.

To meet demand, about 400,000 new homes are required each year, according to estimates. TurkStat data shows that there are already 15m registered housing units in the country, with an average of 600,000 homes obtaining construction permits every year. This does not include unauthorised housing units, which would increase the number exponentially, according to Erste. Some 17% of all housing in Turkey is in Istanbul, 6.8% in Ankara, 6.1% in Izmir, 3.6% in Konya, 2.7% in Adana and 2.5% in Antalya.

About 10m families, or 68% of Turkey's population, live in their own homes, while 3.6m families, or 24% of the total, live in rented accommodation. Five years ago, these ratios were, respectively, 60% and 33%, according to Erste.

Monthly interest rates might have risen to 1% from 0.75% mainly due to global liquidity concerns, but this still compares well with the 7.5% of 10 years ago, argues Erste. As such, between March 2008 and June 2011, the volume of housing loans in the country doubled to reach TRY70bn. This is still only about 6% of Turkey's total GDP, and low in comparison with the average of 43% in European countries. "In our view, there will be no changes imposed on the loan/value ratio, since housing loan growth is not a main driver of the current account deficit. We note that 1% monthly interest rate levels are still low compared to historically higher ones," writes Erste.

While the Real Estate Investment Trust (REIT) index on the Istanbul Stock Exchange has underperformed the overall index, this should be regarded as a buying opportunity, argues Erste. Erste issued "buy" recommendations for Emak Konut REIT and Sinpas REIT.